S-1/A 1 d238359ds1a.htm AMENDMENT NO.3 TO FORM S-1 Amendment No.3 to Form S-1
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As filed with the Securities and Exchange Commission on March 24, 2017

Registration No. 333-215244

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Schneider National, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Wisconsin   4213   39-1258315

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3101 Packerland Drive

Green Bay, WI 54313

(920) 592-2000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Christopher B. Lofgren

Chief Executive Officer

Schneider National, Inc.

3101 Packerland Drive

Green Bay, WI 54313

(920) 592-2000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

William J. Whelan, III

Johnny G. Skumpija

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, New York 10019

(212) 474-1000

 

Paul J. Kardish

General Counsel, Secretary and Executive Vice President

Schneider National, Inc.

3101 Packerland Drive

Green Bay, WI 54313

(920) 592-2000

 

Kenneth B. Wallach

Ryan R. Bekkerus

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class Of

Securities To Be Registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Aggregate

Offering Price

Per Share

 

Proposed

Maximum

Aggregate

Offering Price(2)

 

Amount Of

Registration Fee(3)

Class B Common Stock, no par value

 

33,289,000

  $20.00   $665,780,000   $77,164

 

 

(1) Includes 4,342,000 shares of Class B Common Stock which may be purchased pursuant to the underwriters’ over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933.
(3) The registrant previously paid $11,590 of this amount in connection with the initial filing of the registration statement on December 22, 2016.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated March 24, 2017

 

28,947,000 shares

 

 

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Schneider National, Inc.

Class B Common Stock

 

 

This is Schneider National, Inc.’s initial public offering. We are selling 16,842,000 shares of our Class B common stock and the selling shareholders identified in this prospectus are selling 12,105,000 shares of our Class B common stock. We will not receive any proceeds from the sale of shares being sold by the selling shareholders. This is our initial public offering and no public market exists for our Class B common stock. We anticipate that the initial public offering price of our Class B common stock will be between $18.00 and $20.00 per share. Our Class B common stock will be listed on The New York Stock Exchange (“NYSE”) under the symbol “SNDR.”

Immediately following this offering, we will have two classes of authorized and outstanding common stock, Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except with respect to certain voting and conversion rights. The record holder of our Class A common stock, the Schneider National, Inc. Voting Trust, is entitled to ten votes per share and holders of our Class B common stock are entitled to one vote per share. Each share of Class A common stock is convertible into one share of Class B common stock at any time and automatically converts into one share of Class B common stock if it is withdrawn from the Schneider National, Inc. Voting Trust and/or is transferred outside the Schneider family. See “Description of Capital Stock—Class A Common Stock.” Outstanding shares of Class A common stock will represent approximately 90.2% of the voting power of our outstanding capital stock following this offering.

Immediately following this offering, the Schneider National, Inc. Voting Trust, our controlling shareholder, will continue to control a majority of the votes among all shares eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance rules of the NYSE. See “Management—Controlled Company Status.”

We have granted the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an additional 4,342,000 shares of Class B common stock at the public offering price, less underwriting discounts and commissions.

 

 

Investing in our Class B common stock involves risks. See “Risk Factors” beginning on page 20.

 

 

 

      

Per Share

      

Total

 

Initial public offering price

       $                      $              

Underwriting discounts and commissions*

       $                      $              

Proceeds, before expenses, to us

       $                      $              

Proceeds, before expenses, to selling shareholders**

       $                      $              

 

* We have agreed to reimburse the underwriters for certain Financial Industry Regulatory Authority, or FINRA, related expenses. The underwriters have agreed to reimburse us for certain expenses of the offering. See “Underwriting (Conflict of Interest)” for a description of all compensation payable to the underwriters.
** We have agreed to pay all underwriting discounts and commissions and certain other offering expenses for the selling shareholders incurred in connection with the sale.

The underwriters expect to deliver the shares to purchasers on or about                 , 2017 through the book-entry facilities of The Depository Trust Company.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

Morgan Stanley    UBS Investment Bank
BofA Merrill Lynch
Citigroup           Credit Suisse   J.P. Morgan   Wells Fargo Securities
Baird    Wolfe Capital Markets and Advisory

The date of this prospectus is                 , 2017.


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You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. We do not, and the underwriters do not, take any responsibility for, and can provide no assurances as to, the reliability of any information that others provide to you. We are offering to sell, and seeking offers to buy, shares of Class B common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class B common stock.

 

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ABOUT THIS PROSPECTUS

In this prospectus, unless the context otherwise requires, “the company,” “we,” “us” and “our” refers to Schneider National, Inc., a Wisconsin corporation, together with its consolidated subsidiaries. Unless otherwise indicated, the information contained in this prospectus is as of                 , 2017, and assumes that the underwriters’ over-allotment option is not exercised.

In this prospectus, we refer to our Class A common stock, no par value per share, and our Class B common stock, no par value per share, as our Class A common stock and our Class B common stock, respectively, and, together, as our common stock. Unless otherwise indicated, all references to our common stock refer to our common stock as in effect at the time of the completion of this offering.

Prior to the completion of this offering, our Class A and Class B common stock was considered redeemable under GAAP because of certain repurchase rights granted to our shareholders pursuant to the Schneider National, Inc. Employee Stock Purchase Plan and certain agreements governing ownership of our common stock held by existing shareholders, including members of the Schneider family and their family trusts. All such repurchase rights will be terminated contemporaneously with, and contingent upon, the completion of this offering via amendments to these documents. References to our redeemable Class A common stock or redeemable Class B common stock refer to our common stock prior to the termination of these repurchase rights contemporaneously with this offering.

This prospectus contains references to fiscal year 2016, fiscal year 2015, fiscal year 2014, fiscal year 2013 and fiscal year 2012, which represent our fiscal years ended December 31, 2016, December 31, 2015, December 31, 2014, December 31, 2013 and December 31, 2012, respectively.

“GAAP” as used in this prospectus refers to United States generally accepted accounting principles.

NON-GAAP FINANCIAL MEASURES

In addition to our net income determined in accordance with U.S. GAAP, we evaluate operating performance at an enterprise level using certain non-GAAP measures, including adjusted income from operations, adjusted EBITDA, adjusted net income, adjusted net income per share, adjusted enterprise revenue (excluding fuel surcharge) and adjusted operating ratio. Management believes the use of non-GAAP measures assists investors in understanding the ongoing operating performance of our business by presenting comparable financial results between periods. The non-GAAP information provided is used by our management and may not be comparable to similar measures disclosed by other companies, because of differing methods used by other companies in calculating adjusted income from operations, adjusted EBITDA, adjusted net income, adjusted net income per share, adjusted enterprise revenue (excluding fuel surcharge) and adjusted operating ratio. The non-GAAP measures used herein have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.

GLOSSARY OF TRUCKING AND OTHER TERMS

As used in this prospectus:

Asset-light network intermodal provider” means a provider that uses company-owned containers (and potentially chassis) or trailers and company-owned dray trucks in providing intermodal service. This model is less asset intensive than a truckload model but affords more control over equipment quality and availability than a traditional non-asset intermodal provider.

Associate” means our employees and does not include owner-operators, which are independent contractors, or their owner-operator drivers or other employees.

 

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Brokerage” or “freight brokerage” means the customer loads for which we contract with third-party trucking companies to haul the load under third-party authority.

Bulk tanker trailers” means trailers capable of transporting large quantities of unpackaged cargo. The cargo is moved either as a single undivided whole (one type of product), or in multiple divided compartments within the trailer (one or more types of product).

Chassis” means the frame and wheels of a trailing unit upon which a container may be placed.

Company assets” means assets owned by the company as well as those acquired under capital and/or operating leases.

Company containers” means cargo containers owned or leased by the company.

Company trucks” means trucks owned or leased by the company.

Container” means a cargo container used in the domestic intermodal market with dimensions approximately the same as a 53-foot dry van that can be lifted from a detachable chassis and placed on a railcar (as opposed to international intermodal containers, which are 20-foot or 40-foot International Standards Organization (ISO) containers). Domestic intermodal containers are often double stacked on rail cars to minimize transportation cost.

Core carrier” means one of a shipper’s preferred truckload carriers. Generally, shippers utilize a core carrier or core carrier group to improve service levels, reduce the complexity involved with managing a large number of carriers and experience efficiencies created through the level of trust, shipment density and communication frequency associated with a core carrier.

Cross docking” means the practice in logistics of unloading materials from an incoming trailer or railroad car and loading these materials directly into outbound trailers or containers, with little or no storage in between.

CSA” means the Federal Motor Carrier Safety Administration’s Compliance, Safety, Accountability initiative, which ranks both fleets and individual drivers based on multiple categories of safety-related data in an online Safety Measurement System.

C-TPAT ” means the Customs-Trade Partnership Against Terrorism, a program designed to improve cross-border security between the United States and Canada and the United States and Mexico. Carrier members of the C-TPAT are entitled to shorter border delays and other priorities over non-member carriers.

Dedicated contracts” means those contracts in which we have agreed to dedicate certain truck and trailer capacity for use by a specific customer. Dedicated contracts often have predictable routes and revenue and frequently replace all or part of a shipper’s private fleet. Our dedicated contracts generally average three years and are priced using a model that analyzes the cost elements, including revenue equipment, insurance, fuel, maintenance, drivers needed and mileage.

Drayage” or “dray” means the transport of shipping containers from a dock or port to an intermediate or final destination or the transport of containers or trailers between pickup or delivery locations and a railhead. We directly provide drayage or utilize third parties in the pick-up and delivery associated with an intermodal movement, or for the pick-up and delivery to and from an ocean shipping port and an inland destination.

Dry van or standard trailer” means a simple, enclosed, non-climate controlled 53-foot trailer that carries general cargo, including food and other products that do not require refrigeration.

 

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Electronic On-board Recorder” or “EOBR” means an electronic logging device that enables professional truck drivers and commercial motor carriers to track Hours of Service (HOS) compliance by monitoring the time spent by the driver in operating a truck.

Final mile” means the movement of goods from a distribution center, warehouse or cross-dock to a final destination at the consumer’s home or business.

First-to-final mile” means the movement of goods from a shipper to a distribution center, warehouse or cross-dock and then to a final destination at the consumer’s home or business.

Flatbed trailer” means an open trailer with no sides used to carry large objects such as heavy machinery and building materials.

For-hire truckload carriers” means a truckload carrier available to shippers for hire.

For-hire contract” means a contract with a customer providing for services based on spot market or lane-based pricing rates.

Fuel surcharge” means fees that are charged to a customer by a shipping company to pass through the costs of fuel in excess of a predetermined cost per gallon base (generally based on the average price of fuel in the United States as determined by the Department of Energy). Shipping company customers, such as our truckload customers, pay surcharges. In our intermodal business, our railroad partners charge fuel surcharge to us as their customers.

Fuel surcharge revenue” means revenue attributable to fuel surcharges generated by Schneider.

Intermodal” means the transport of shipping containers (COFC) or trailers (TOFC) on railroad flat cars before or after a movement by truck from the point of origin to the railhead or from the railhead to the destination.

Less-than-truckload carriers” or “LTL carriers” means carriers that pick up and deliver multiple shipments, each typically weighing less than 10,000 pounds, for multiple customers in a single trailer.

Line haul” means the movement of freight on a designated route between cities and terminals.

Loads/orders” or “loads” is used to refer to requests from our customers other than our intermodal customers for services.

Omni-channel retailers” means retailers that offer a variety of channels for a customer’s shopping experience, which may involve pre-purchase research. Such channels may include retail, online, mobile and mobile app stores and telephone sales.

Orders” means requests from our intermodal customers for services.

Over-dimensional” means freight of a certain size or dimension that renders traditional shipping and packing methods used by less-than-truckload carriers inefficient or time-consuming for at least a portion of the transportation route when compared to trucks.

Owner-operator” means a trucking business with whom we contract to move freight utilizing our operating authority, generally by pulling Schneider trailers attached to the owner-operator trucks driven by owner-operator

 

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drivers. The driver of an owner-operator truck may also be the owner of the associated owner-operator trucking business. Owner-operators have the ability to select the loads that they choose to move. Owner-operators are generally compensated on a percentage of revenue basis and must pay their own operating expenses, such as fuel, maintenance, the truck’s physical damage insurance and driver costs, and must meet our specified standards with respect to safety. Owner-operators hired by other companies in our industry are generally compensated on a per-mile basis.

Preferred lanes” means the routes along which we strive to direct most of our trucks.

Private fleet” means the trucks and trailers owned or leased, and operated, by a shipper to transport its own goods.

Private fleet outsourcing” means the decision by shippers using a private fleet to outsource all or a portion of their transportation and logistics requirements to for-hire truckload carriers. Some shippers that previously maintained their own private fleets outsource this function to for-hire truckload carriers, like us, to reduce operating costs and to focus their resources on their core businesses.

Revenue per order” means revenue (excluding fuel surcharge) per order.

Revenue per truck per week” means the revenue (excluding fuel surcharge) that a truck, available to work, generates (on average) over a work week.

Specialty equipment” means trailing equipment, other than dry vans, used in our truckload segment. Examples would be flatbed trailers, bulk tanker trailers and temperature controlled trailers.

Stop-off pay” means the compensation we receive from customers for stopping a haul to pick up or unload a portion of the load or to allow for a sample testing of the product being transported.

Straight truck” means a vehicle with the cargo body and tractor mounted on the same chassis.

Team driving” means two drivers occupying a single truck who alternate between driving and non-driving time (such as time spent sleeping and resting) in order to expedite the shipment and maximize the overall production of the truck by decreasing idle time in transit to its destination.

Temperature controlled” means an enclosed, temperature controlled trailer, generally used to carry perishable goods.

Third-party logistics provider” or “3PL” means a provider of outsourced logistics services. In logistics and supply chain management, it means a company’s use of third-party businesses, the 3PL(s) to outsource elements of the company’s distribution, fulfillment and supply chain management services.

Total miles” means the miles driven both with and without revenue-generating freight being transported.

Tractor” means a vehicle with the ability to tow a trailer, generally by the use of the fifth wheel mounted over the tractor’s drive axle.

Trailer” means a cargo body that is mounted on a separate chassis and attached to the back of a tractor or, in the case of a tandem rig, the tail of another trailer attached to a tractor.

Trans-loading” means the process of transferring a shipment from one mode of transportation to another, through multiple forms of transportation including ship and rail. It is most commonly employed when one mode of transportation or one vehicle cannot be used for the entire trip, such as when goods must be shipped internationally from one inland point to another.

 

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Truck” means a vehicle that carries goods in a cargo body mounted to its chassis, such as a straight truck, and/or in a trailer towed by the vehicle, such as a tractor. Our truck fleet is mostly comprised of Class 8 tractors, which are generally over 33,000 pounds in gross vehicle weight rating.

Truckload carrier” means a carrier that generally dedicates an entire trailer to one customer from origin to destination.

Unbilled miles” means miles driven without revenue generation for us.

White glove” means a delivery service in which the shipped items are unloaded from a truck and then unpackaged and placed into a specific location designated by the customer.

 

 

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PROSPECTUS SUMMARY

The following summary highlights information about our business and the offering of our Class B common stock that appears elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class B common stock. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

OUR COMPANY

We are a leading transportation and logistics services company providing a broad portfolio of premier truckload, intermodal and logistics solutions and operating one of the largest for-hire trucking fleets in North America. We believe we have developed a differentiated business model that is difficult to replicate due to our scale, breadth of complementary service offerings and proprietary technology platform. Our highly flexible and balanced business combines asset-based truckload services with asset-light intermodal and non-asset logistics offerings, enabling us to serve our customers’ diverse transportation needs. Since our founding in 1935, we believe we have become an iconic and trusted brand within the transportation industry by adhering to a culture of safety “first and always” and upholding our responsibility to our associates, our customers and the communities that we serve.

We are the second largest truckload company in North America by revenue, one of the largest intermodal transportation providers in North America by revenue and an industry leader in specialty equipment services and e-commerce fulfillment. We categorize our operations into the following reportable segments:

 

    Truckload – which consists of freight transported and delivered with standard and specialty equipment by our company-employed drivers in company trucks and by owner-operators, executed through either for-hire or dedicated contracts.

 

    Intermodal – which consists of door-to-door, container on flat car service by a combination of rail and over-the-road transportation, in association with our rail carrier partners. Our intermodal service offers vast coverage throughout North America, including cross-border freight through company containers and trucks.

 

    Logistics – which consists of non-asset freight brokerage services, supply chain services (including 3PL) and import/export services. Our logistics business typically provides value-added services using third-party capacity, augmented by our assets, to manage and move our customers’ freight.

We also engage in equipment leasing and provide insurance to support owner-operators, which combined with our limited Chinese truck brokerage and logistics operations, account for our remaining operating revenue.

Our portfolio consists of approximately 10,500 company and 2,850 owner-operator trucks, 37,900 trailers and 18,100 intermodal containers across North America and approximately 19,300 enterprise associates. We serve a diverse customer base across multiple industries represented by approximately 16,000 customers, including nearly 200 Fortune 500 companies. Each day, we transit over 8.9 million miles, equivalent to circling the globe approximately 360 times. Our logistics business manages nearly 23,000 qualified carrier relationships and, in 2016, managed approximately $2 billion of third-party freight. Our portfolio diversity, network density throughout North America and large fleet allow us to provide an exceptional level of service to our customers and consistently excel as a reliable partner, especially at times of peak demand.

 



 

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We believe we offer one of the broadest arrays of services in the transportation and logistics industries, ranging from dry van to bulk transport, intermodal to supply chain management and first to final mile “white glove” delivery. We believe we differentiate ourselves through expertise in services that utilize specialty equipment, which have high barriers to entry. With our recent acquisitions of Watkins and Shepard Trucking, Inc. (Watkins & Shepard) and Lodeso, Inc. (Lodeso) we have established a national footprint and expertise in shipping difficult-to-handle consumer items, such as furniture, mattresses and other household goods, which based on internal research conducted by management have been in the forefront of the transition in consumer purchasing patterns to the e-commerce channel. Our comprehensive and integrated suite of industry leading service offerings allows us to better meet customer needs and capture a larger share of our customers’ transportation spend. Customers value our breadth of services, demonstrated by 21 of our top 25 customers utilizing services from all three of our reportable segments.

The following graphic demonstrates the breadth and diversity of our service offerings:

 

 

LOGO

In 2007, we launched Quest, a multi-year, comprehensive business processes and technology transformation program, using technology from our strategic development partner, Oracle Corporation. As part of this transformation, we created a quote-to-cash technology platform, which we refer to as our Quest platform, that serves as the backbone of our business and seamlessly integrates all business lines and functions. Our state-of-the-art Quest platform allows us to make informed decisions at every level of our business, providing real-time data analytics to optimize network density and equipment utilization across our entire network, which drives better customer service, operational efficiency and load optimization. We also realigned our organization to give our associates a direct line of sight to profit-and-loss responsibility both within their business lines and across the organization. This organizational change combined with our Quest platform empowers our associates to proactively pursue business opportunities that enhance profitability while maintaining high levels of customer service. We believe our over $250 million investment in technology and our related organizational realignment over the past several years have enabled us to improve our profit margins and put us in a favorable position to expand our profit margins and continue growing our business.

 



 

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Since refocusing our strategy and initiating our Quest technology and business transformation in 2007, we have experienced strong revenue growth and margin expansion, which is demonstrated in the following table.

 

(in thousands)    2016 Fiscal Year      3-Year CAGR(1)  

Operating revenue

   $ 4,045,736        3.7

Adjusted enterprise revenue (excluding fuel surcharge)(2)

   $ 3,751,696        7.7

Net income

   $ 156,851        18.0

Adjusted EBITDA(3)

   $ 559,130        13.1

Adjusted net income(3)

   $ 158,443        17.7

 

(1) Three-year compound annual growth rate from January 1, 2014 through December 31, 2016.
(2) Adjusted enterprise revenue (excluding fuel surcharge) is a non-GAAP financial measure. For a reconciliation of operating revenue, the most closely comparable GAAP measure, to adjusted enterprise revenue (excluding fuel surcharge), see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”
(3) Adjusted EBITDA and adjusted net income are non-GAAP financial measures. For a reconciliation of net income to adjusted EBITDA and adjusted net income, in each case for which net income is the most comparable GAAP measure, see “—Summary Historical Consolidated Financial and Other Data.”

Schneider was founded in 1935 by Al J. Schneider in Green Bay, Wisconsin, and further developed under the leadership of his son, Donald J. Schneider. Schneider’s deeply-rooted culture embodies several core values:

 

    Safety First and Always

 

    Integrity in Every Action

 

    Respect for All

 

    Excellence in What We Do

We put these values into practice through the Schneider “Value Triangle” of operational excellence. A guiding tenet of our business for over a decade, our “Value Triangle” provides a key reference for our associates to consider when making business decisions at each level of the company, including the needs of our customers, our associates and our business and its shareholders. We believe managing and balancing these often competing interests compels us to weigh the collective benefits to all of our stakeholders for every business decision.

 

 

LOGO

 



 

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OUR INDUSTRY

Truckload

Trucking is the primary means of serving the North American transportation market and hauls approximately 70% of freight volume within the United States, which is embodied in a common phrase used within our industry: “if you’ve got it—a truck brought it.” Trucking continues to attract shippers due to the mode’s cost advantages relative to air transportation and flexibility relative to rail. Truckload growth is largely tied to U.S. economic activity such as GDP growth and industrial production and moves in line with changes in sales, inventory and production within various sectors of the U.S. economy. Truckload volumes are also positioned to benefit from secular trends in e-commerce retail, which is expected to grow at a 13% CAGR from 2014 to 2019 according to e-Marketer. Based on estimates by the American Trucking Associations (ATA), the U.S. trucking industry generated approximately $726 billion in revenue in 2015 and is expected to grow at a CAGR of 4.8% from 2016 to 2022.

The U.S. truckload industry is large and fragmented, characterized by many small carriers with revenues of less than $1 million per year, less than 50 carriers with revenues exceeding $100 million per year and 10 carriers with revenues exceeding $1 billion per year, according to 2015 data published by Transport Topics, an ATA publication. According to Department of Transportation (DOT) data, there were over 550,000 trucking companies in the United States at the end of 2015, approximately 90% of which owned 10 or fewer trucks.

Regulations and initiatives to improve the safety of the U.S. trucking industry have impacted industry dynamics. We believe the recent trend is for industry regulation to become progressively more restrictive and complex, which constrains the overall supply of trucks and drivers in the industry. Examples of recently enacted and upcoming regulations and initiatives include the Comprehensive Safety Analysis (CSA) initiative (2010), Hours of Service (HOS) rules (2013) and mandatory use of electronic logging devices to enforce Hours of Service (HOS) rules (2015), hair follicle (2016) and sleep apnea screening (upcoming), installation of speed limiters (2016) and phase 2 emission standards (2016). We believe small carriers will likely be challenged to maintain the utilization required for acceptable profitability under this regulatory framework.

Domestic Intermodal

Domestic intermodal transportation involves the transportation of freight in a 53-foot container or trailer, combining multiple modes of transportation (rail and truck) within the United States, Canada and Mexico. Eliminating the need for customers to directly handle freight when changing modes between rail and truck, intermodal transportation holds significant productivity, cost and fuel-efficiency advantages when moving mass freight. Domestic intermodal volumes are largely driven by over-the-road conversions from truckload to intermodal and from the volume of overseas imports into the United States, such as from China. Our management estimates the North American intermodal and drayage market to be $22 billion. According to the Association of American Railroads (AAR), intermodal has grown from 27% of all railcar loads in 1990 to 49% in 2015. Domestic intermodal accounts for 50% of total intermodal volume according to the Intermodal Association of North America (IANA). With fuel costs likely to increase in the long-term, fuel efficiency regulations set to tighten and labor shortages in the trucking industry, the intermodal market is well-positioned to take on freight capacity as trucking markets face external pressures.

The intermodal market is comprised of service providers of differing asset intensity, with customers being served by either non-asset intermodal marketing companies (IMCs) or asset-light network intermodal providers such as Schneider. While IMCs are the most prevalent intermodal solution provider, asset-light network intermodal providers offer differentiated higher-value solutions to customers given the reliability, geographic breadth and high service levels of company assets (trucks, containers and even chassis) compared to non-asset IMCs.

 



 

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The domestic intermodal segment is highly consolidated, where the top three intermodal providers operate over 50% of the U.S. dry van domestic container fleet, according to management estimates. Network density, size and scale are critical barriers to entry in the intermodal market. Increasing sophistication and complexity of shippers’ needs require network density and the ability to deliver reliable capacity. According to AAR, railroads have been spending record amounts in recent years to maintain and improve their infrastructure and equipment, which we believe supports growth of the intermodal industry and improves the efficiency and reliability of the railroad component of our intermodal service.

Logistics

The logistics industry is a large, fast-growing and fragmented market that represents an integral part of the global economy. As supply chain complexity increases, corporations have elected to focus on innovation, design, sales and marketing of their products rather than supply chain operations. Increased material costs coupled with enhanced global competition impose margin pressure on manufacturers, requiring the outsourcing of noncore transportation logistics to supply chain specialists who offer a combination of scale, strong technology platforms and lower costs. Additionally, more shipments of inputs and products will be transported using multiple modes and technical expertise, driving shipper preferences for logistics providers with an asset-based network to complement their third-party capacity. Transportation asset owners often provide logistics services to meet excess demand and provide customers with greater breadth of services.

OUR COMPETITIVE STRENGTHS

We believe the following key strengths have been instrumental to our success and position us well to continue growing our business and market share:

Iconic large-scale diversified North American truckload provider with a modern fleet

Over the past 80 years, we have become one of North America’s largest and most trusted providers of truckload services, including specialty equipment services. We have established a leading position through our commitment to provide an outstanding level of customer service. In 2016, we received 27 awards from customers and the media in recognition of our exceptional service and reliability. We operate one of North America’s largest truckload fleets with approximately 11,900 trucks and 37,900 trailers used in our truckload business. Given our large scale, we offer both network density and broad geographic coverage to meet our customers’ transportation needs across North America. Our scale and strong balance sheet provides us with access to capital necessary to consistently invest in our capacity, technology and people to drive performance and growth, and to comply with regulations. Our scale also gives us significant purchasing benefits in third-party capacity, fuel, equipment and MRO (maintenance, repair and operations), lowering our costs compared to smaller competitors.

Over the past several years, we have made significant investments in safety-enhancing equipment and technology, including roll stability, collision avoidance, forward facing cab cameras, training simulators and real-time truck sensor monitoring. Our relentless focus on safety not only enables us to better uphold our responsibility towards our associates, customers and the community, but also provides a critical competitive advantage in an industry with increasingly stringent safety and regulatory requirements and results in lower operating risk and insurance costs. In 2010, we were among the first large-scale carriers to fully equip our fleet with EOBRs, providing improved network management and safety. Unlike carriers that have yet to undertake the electronic logging device implementation process, we have significant experience operating with EOBRs and are well-positioned to benefit from the upcoming legislation on mandatory electronic logging device standards, which we expect will tighten truckload capacity and subsequently increase rates.

 



 

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Industry leading and highly scalable Quest technology platform integrated across all business lines and functions

Our early investment and adoption of next generation technology and data analytics is a competitive advantage. We believe we are the only truckload and intermodal industry player of size to have completed, integrated and culturally adopted a comprehensive quote-to-cash technology transformation that allows us to efficiently match capacity with customer loads/orders. Our Quest platform allows us to assess our entire network every 90 seconds, resulting in real-time, round-the-clock visibility into every shipment and delivery, route schedules, truck and driver capacity and the profitability of each load/order. Our Quest platform enables us to minimize unbilled miles, optimize driver efficiency and improve safety, resulting in increased service levels and profitability. We manage the purchasing of over 500,000 gallons of fuel per day and communicate to our drivers optimal timing and locations for refueling through our Quest platform, which increases our fuel efficiency and lowers our fuel purchasing costs. We have become a pioneer in applying “decision science” technology to trucking and intermodal freight that enhances driver and asset efficiency, leading to higher profitability and driver satisfaction. We receive and process millions of driver and equipment location updates daily, allowing us to select the optimal driver, truck and trailer for each load/order. This has been a key driver of increased profitability per load and operating margin improvements over the last few years. We believe that our Quest technology and business transformation provides us with a clear advantage within the transportation industry from which we are continuing to realize the financial benefits.

Leadership in fast-growing e-commerce, final mile and other specialty equipment markets

Our recent acquisitions of Watkins & Shepard and Lodeso have allowed us to rapidly expand our customized home, commercial and retail delivery offerings with “white glove” service for brick and mortar and e-commerce customers. New components of our final mile services include real-time shipment tracking for customers and our proprietary Simplex technology, which integrates with retailers’ e-commerce infrastructure, providing seamless end-to-end solutions and visibility for complex final mile deliveries. E-commerce has increasingly become the preferred channel for purchasing difficult-to-handle items, an area in which Watkins & Shepard and Lodeso specialize. Our expertise in this channel and national footprint in the final mile market positions us well to capitalize on this high-growth market opportunity that traditional less-than-truckload and package delivery operations generally cannot serve.

We have established a major nationwide presence in numerous specialty equipment freight markets with premium pricing and higher barriers to entry, including bulk chemicals, energy services and other specialty liquids. Our large specialty equipment asset base positions us to serve customers across the country, which differentiates us from most of our regional-based competitors and positions us well to take market share with large customers who value our geographic reach.

A leading intermodal business with built-in cost reductions through transition to a company-owned chassis model driving profitability

We are currently one of the largest intermodal providers in North America by revenue and are well-positioned for future growth in intermodal freight through our nationwide network and company container model. Our long-standing railroad relationships with BNSF Railway, CSX Transportation, Canadian National Railway, Kansas City Southern Railway and other regional rail carriers, such as Florida East Coast Railway, provide rail access nationwide. Our customers value our intermodal network over IMCs due to our consistent access to capacity through our company assets and high-quality drayage services that provide a larger geographic reach around intermodal terminals. We are in the process of converting from our rented chassis model to a company-owned chassis model. This conversion will lower our all-in chassis operating costs, improve service reliability, as well as increase driver efficiency and satisfaction, by increasing our control over the chassis

 



 

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operations of our intermodal business. We expect to complete our conversion to a company-owned chassis fleet by December 2017. We believe that our balanced network and large base of company assets provide a significant competitive advantage that would be difficult for other carriers to replicate.

Fast-growing non-asset logistics business expanding our customer base and complementing our asset-based network

Our non-asset logistics business represents our fastest-growing segment and complements our asset-based businesses with freight brokerage services and comprehensive supply chain management. In the three years from January 1, 2014, through December 31, 2016, our logistics segment operating revenue grew at a CAGR of 16.5%. Our logistics business not only provides additional services to existing customers and incremental freight to our assets, but helps to facilitate the expansion of our customer base and offers opportunities for cross-selling our suite of services. In 2016, our logistics business helped generate approximately $147 million in revenue for our truckload and intermodal segments. The scale of our asset-based network and our relationships with over 20,000 third-party carriers allow us to provide our brokerage and supply chain services (including 3PL) to our customers at competitive rates. By also offering warehousing, trans-loading and port drayage, we can provide customers with a suite of services that covers their entire North American transportation supply chain.

Diversified and resilient revenue mix supporting stable growth through business cycles

Our diverse portfolio of services, equipment, customers and end markets allows for resilient and consistent financial performance through all business cycles. We believe we offer the broadest portfolio of services in our industry, including in our truckload business, which consists of freight transported and delivered with dry van and specialty equipment by drivers in company trucks and by owner-operators. In addition to both long-haul and regional shipping services, our truckload services include team-based shipping for time-sensitive loads (utilizing dry van equipment) and bulk, temperature controlled, final mile “white glove” delivery and customized solutions for high-value and time-sensitive loads (utilizing specialty equipment). Our primarily asset-based truckload business is complemented by our asset-light intermodal and non-asset logistics businesses. Asset-based operations have the benefit of providing shippers with certainty of capacity and continuity of operations, while non-asset operations generally have lower capex requirements, higher returns on invested capital and lower fixed costs. We also manage a balanced mix of spot rates and contracted rates, through for-hire and dedicated contracts, to take advantage of freight rate increases in the short-term while benefiting from more resilient contracted revenue. Our dedicated contracts typically average three years in duration and provide us with greater revenue stability across economic cycles, promote customer loyalty and increase driver retention due to higher predictability in number of miles along familiar routes and time at home.

Our broad portfolio also limits our customer and industry concentration as compared to other carriers. We receive revenue from a diversified customer base with no single customer representing 10% or more of our operating revenue. The percentage of our adjusted enterprise revenue (excluding fuel surcharge) derived from our top ten customers has decreased by approximately 810 basis points over the past five years. New business increased by approximately $450 million in 2016. We maintain a broad end-market footprint, encompassing over ten distinct industries including general merchandise, chemicals, electronics & appliances, and food & beverage, among others. Our diversified revenue mix and customer base drives stability throughout the fiscal year, even though many of our customers are affected by seasonal fluctuations.

Proven and motivated management team with deep transportation industry expertise

We have a premier management team with extensive experience in the transportation and logistics industry, as well as a proven track record of success through various business environments. Our Chief Executive Officer

 



 

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and President, Christopher B. Lofgren, has over 22 years of experience at Schneider, a PhD in Industrial and Systems Engineering and is responsible for spearheading our Quest technology and business transformation. Our senior management team has spent on average over 14 years with Schneider and is composed of highly experienced transportation and logistics industry experts overseeing day-to-day operations. Our management team’s compensation structure and ownership of common stock provide further incentive to improve business performance and profitability. Our governance structure provides key independent oversight, complementing the strengths of the management team. A majority of the members of our Board of Directors are independent, a structure that has been in place since 1988. Our senior management team’s experience and commitment to upholding deeply-rooted values of safety, respect, integrity and excellence will continue to be critical to our future growth and performance. We believe our leadership team is well-positioned to execute our strategy and remains a key driver of our financial and operational success.

OUR GROWTH STRATEGIES

Our goals are to grow profitably, drive strong and consistent return on capital and increase stakeholder value. We believe our competitive strengths position us to pursue our goals through the following strategies:

Strengthen core operations to drive organic growth and maintain a leading market position

We intend to drive organic growth through leveraging our existing customer relationships, as well as expanding our customer base. With a broad, comprehensive service offering and a true North American footprint, we believe we have substantial cross-selling opportunities and the potential to capture a greater share of each customer’s annual transportation and logistics expenditures. We also plan to drive revenue growth by increasing market share amid a fragmented marketplace by marketing our services to customers seeking to outsource their transportation services. Our Quest platform serves as an instrumental factor in driving profitable growth from both new and existing customers as it enables real-time, data-driven decision support and business analysis of every load/order, assisting our associates in proactively cross-selling our broad suite of offerings. Together with our highly incentivized and proactive sales organization, our data-driven Quest platform will drive better service and organic growth in each of our reportable segments.

Expand capabilities in specialty equipment freight market and continue growing our freight brokerage business

We believe that our capabilities position us to grow in the specialty equipment market, which enjoys higher barriers to entry and a premium to conventional dry van pricing. The complexity and time-sensitivity of the loads often require enhanced collaboration with, and greater understanding of, our customers’ business needs and processes. The transportation of specialty equipment freight requires specially trained drivers with appropriate licenses and special hauling permits, as well as equipment that can handle items with unique requirements in terms of temperature, freight treatment, size and shape. As such, there are few carriers that have comparable network scale and capabilities in the specialty equipment market, which we believe will allow us to profitably grow in that segment.

The growth of our freight brokerage business, which is a significant part of our logistics segment, contributed to the growth of our logistics segment operating revenue, which grew at a CAGR of 16.5%, in the three years from January 1, 2014 through December 31, 2016. As shippers increasingly consolidate their business with fewer freight brokers, we are well-positioned to become one of their select providers due to our customer service and established, dense network of third-party carriers. Large shippers in particular see the value of working with providers like us that have scale, capacity and lane density, as they are more reliable, efficient and

 



 

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cost effective at covering loads. Our freight brokerage business provides us with the opportunity to serve our customers more broadly where we might not otherwise serve them, building diversity and resiliency in our existing customer portfolio in a non-asset manner with minimal capital deployment.

Capitalize on the growth of e-commerce fulfillment

As a leading “first, final and every mile” carrier for difficult-to-handle consumer items, such as furniture and mattresses, one of the fastest-growing e-commerce markets, we are well-positioned to capitalize on continued e-commerce growth. According to e-Marketer, the e-commerce industry is set to grow at four times the rate of traditional retail in North America (13% vs. 3% 2014-2019 CAGR) and is anticipated to reach 13% of total retail sales worldwide by 2019 (up from 6% in 2014). We provide services for many online retailers, offering first-to-final mile delivery from warehouses to consumer living rooms. Unlike many competitors, we have the technological capability, national footprint and the ability to utilize team driver capacity to provide network breadth and density to meet growing e-commerce fulfillment needs. We intend to leverage our end-market expertise, leading technology platform and end-to-end integrated capabilities to continue taking the complexity out of the supply chain for omni-channel retailers, further driving our revenue in the fast-growing e-commerce market.

Continue to improve our operations and margins by leveraging benefits from recent investments in our Quest technology and business transformation

We continue to benefit from the operational improvements related to our Quest technology and business transformation and continue to improve the effectiveness with which we utilize data to increase revenue and lower costs. We are able to better service customers, retain drivers and generate repeat business by anticipating our customers’ and drivers’ needs and preferences. We believe the future implementation of simple and intuitive customer interfaces will also enable a stronger connection with our customers through increased interaction and an enhanced user experience. We expect additional margin improvement as we continue to leverage data analytics within the Quest platform. The strong foundation we have established with our continuing Quest transformation will allow us to incorporate new technologies and build new capabilities into the platform over time, maintaining our competitive edge and setting the base for future growth.

Allocate capital across businesses to maximize return on capital, and selectively pursue opportunistic acquisitions

Our broad suite of services provides us with a greater opportunity to allocate growth capital in a manner that maximizes returns throughout the seasonal and economic business cycles. For example, we can efficiently move our equipment between services and regions when we see opportunities to maximize our return on capital. We continually monitor our performance to ensure appropriate allocation of capital and resources to grow our businesses while optimizing returns across reportable segments. Furthermore, our strong balance sheet enables us to selectively pursue opportunistic acquisitions that complement our current portfolio. We are positioned to leverage our scalable platform and experienced operations team to acquire high-quality businesses that meet our disciplined selection criteria in order to expand our service offerings and customer base.

Attract and retain top talent at all levels to ensure sustainable growth

Our people are our strongest assets, and we believe they are key to growing our customer base and driving our performance. Our goal is to attract, retain and develop the best talent in the industry across all levels. We strive to foster a collaborative environment and seek individuals who are passionate about our business and fit within our culture. We value the direct relationships we have with our associates and we intend to continue working together without third-party representation. Our compensation structure is performance-based and

 



 

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aligned with our strategic objectives. Amid today’s driver shortage environment, we seek to maintain our reputation as a preferred carrier within the driver community. Our culture, which from its founding was focused on the well-being of our associates, helps us attract and retain high quality drivers. In addition to mandatory physical check-ups, covering among other things sleep apnea, we enforce hair follicle drug testing alongside mandatory urine testing and invest in the well-being of our drivers, which we believe helps us maintain a high quality driver base. Our leading technology platform facilitates the application, screening and onboarding of top talent. As a stable industry leader with a respected safety culture and underlying core values, we believe that we will continue to be the employer of choice for both driving and non-driving associates.

RECENT DEVELOPMENTS

Share Dividend

Our Board of Directors has approved a pro rata share dividend to all of our shareholders as of the record date of March 21, 2017, which we refer to as the pre-IPO split dividend. The pre-IPO split dividend entitles each shareholder to receive 29 shares of our Class A or Class B Common Stock for each share of Class A or Class B Common Stock, respectively, held by the shareholder as of the record date. Unless otherwise indicated, all references in this prospectus to shares of common stock, per share data and related information have been retroactively adjusted, where applicable, to reflect the pre-IPO split dividend as if it had occurred at the beginning of the earliest period presented.

 

 



 

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RISKS RELATED TO OUR BUSINESS AND THIS OFFERING

Investing in our Class B common stock involves a high degree of risk. Before you invest in our Class B common stock, you should carefully consider all the information in this prospectus, including matters set forth in the section entitled “Risk Factors.” If any of these risks actually occur, our business, financial condition and results of operations may be materially adversely affected. In such case, the trading price of our Class B common stock may decline and you may lose part or all of your investment. Below is a summary of the primary risks to our business:

 

    economic and business risks inherent in the truckload industry, including competitive pressures pertaining to pricing, capacity and service;

 

    the significant portion of revenue we derive from our largest customers, including approximately 30% in the aggregate of our adjusted enterprise revenue (excluding fuel surcharge) for fiscal year 2016 with respect to our 10 largest customers;

 

    fluctuations in the price or availability of fuel, the volume and terms of diesel fuel purchase commitments and surcharge collection;

 

    our ability to attract and retain qualified drivers, including owner-operators, in the operation of our intermodal and trucking businesses, which is difficult to predict and is subject to factors outside of our control;

 

    our third-party logistics customers improving their internal logistics operations and transportation services and therefore decreasing their reliance on our service offerings;

 

    our ability to recruit, develop and retain our key associates and drivers;

 

    increased costs of compliance with, or liability for violation of, existing or future federal or state regulations in our industry, which is highly regulated;

 

    significant systems disruptions, including those caused by cybersecurity breaches, affecting our data networks and systems, including tracking and communications systems;

 

    negative seasonal patterns generally experienced in the trucking industry during traditionally slower shipping periods and winter months;

 

    we will be a “controlled company” within the corporate governance rules of the NYSE and, as a result, qualify for, and intend to rely on, the exemption from the requirement that our corporate governance committee be composed entirely of independent directors; and

 

    the interests of our controlling shareholder may conflict with yours in the future, and, for so long as the Schneider National, Inc. Voting Trust (the “Voting Trust”) maintains control of us, our other shareholders will be unable to affect the outcome of proposed corporate actions supported by the Voting Trust trustees or, in the case of certain actions including a change of control, the Schneider family and trusts for their benefit.

Corporate Information

Our principal executive offices are located at 3101 Packerland Drive, Green Bay, Wisconsin, and our telephone number is (920) 592-2000. We also maintain a website at https://schneider.com. The reference to our website is intended to be an inactive textual reference only. The information contained on, or that can be accessed through, our website is not part of this prospectus.

 



 

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THE OFFERING

 

Class A common stock offered

  

None.

Class B common stock offered

  

By us

  

16,842,000 shares.

By the selling shareholders

  

12,105,000 shares.

Option to purchase additional shares of Class B
common stock

  


We have granted the underwriters a 30-day option from the date of this prospectus to purchase up to 4,342,000 additional shares of our Class B common stock at the initial public offering price, less underwriting discounts.

Class A common stock to be outstanding after this
offering

  


83,029,500 shares, representing a 90.2% voting interest (or a 89.7% voting interest, if the underwriters exercise in full their option to purchase additional shares of Class B common stock).

Class B common stock to be outstanding after this
offering

  


90,508,890 shares, representing a 9.8% voting interest (or 94,850,890 shares, representing a 10.3% voting interest, if the underwriters’ exercise in full their option to purchase additional shares of Class B common stock).

Voting rights

  

Shares of Class A common stock are entitled to ten votes per share.

 

Shares of Class B common stock are entitled to one vote per share.

 

Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law. After this offering, the Voting Trust will control almost 90.2% of the voting power of our outstanding capital stock, will continue to hold all of our Class A common stock and effectively control all matters submitted to our shareholders for a vote, except for the vote in any Major Transactions (as defined under “Description of Capital Stock—Shareholder Approval of Major Transactions”), which will be controlled by certain trusts for the benefit of the Schneider family members holding the trust certificates issued by the Voting Trust. See “Description of Capital Stock.”

Controlled company

   Upon the completion of this offering, we will be a “controlled company” under the corporate governance rules of the NYSE . Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements. We intend to take advantage of the exemption from the requirement to have a corporate governance committee that is

 



 

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   composed entirely of independent directors. We have elected not to take advantage of any of the other available exemptions. See “Management—Controlled Company Status.”

Use of proceeds

   We estimate that the net proceeds to us from this offering will be approximately $281 million, or approximately $359 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $19.00 per share (the mid-point of the estimated price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use approximately $100 million of the net proceeds from this offering to repay the senior note outstanding under our Note Purchase Agreement dated May 7, 2010 and approximately $50 million of the net proceeds from this offering to repay amounts outstanding under our Amended and Restated Receivables Purchase Agreement dated as of March 31, 2010, as amended as of December 17, 2013 (the “Accounts Receivable Facility”). We intend to use the remaining net proceeds for general corporate purposes, including capital expenditures, such as chassis purchases (current intention is in an amount of approximately $110 million) as part of our conversion from a rented chassis model to a company-owned chassis model as described on pages 6-7, 86 and 91 of this prospectus, and potential acquisitions. We will not receive any of the proceeds from the sale of our Class B common stock by the selling shareholders named in this prospectus but we will be required to pay the underwriting discounts and commissions associated with such sales of shares. See “Use of Proceeds.”

Dividend policy

  

As a public company we anticipate paying a quarterly dividend to holders of our Class A and Class B common stock.

 

The declaration and payment of all other future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our financial condition, earnings, legal requirements and any debt agreements we are then party to and other factors our Board of Directors deems relevant. “See Dividend Policy.”

Risk factors

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   a discussion of factors you should carefully consider before you decide to invest in our Class B common stock.

Proposed listing and symbol

   Our Class B common stock will be listed on the New York Stock Exchange under the symbol “SNDR.”

Conflict of Interest

   An affiliate of Wells Fargo Securities, LLC will receive at least 5% of the net proceeds of this offering in connection with the repayment of amounts outstanding under the Accounts Receivable Facility. See “Use of Proceeds.” Accordingly, this offering is being made in compliance with the requirements of Rule 5121 of Financial Industry Regulation Authority (“FINRA”). Because Wells Fargo Securities, LLC is not primarily responsible for managing this offering, pursuant to Rule 5121, the appointment of a qualified independent underwriter is not necessary.

Except where expressly indicated otherwise, references to the total number of shares of our Class A common stock and Class B common stock outstanding after this offering is based on 83,029,500 shares of our Class A common stock and 73,666,890 shares of our Class B common stock outstanding as of March 21, 2017, and excludes the following shares:

 

    83,029,500 shares of Class B common stock issuable upon the conversion of our Class A common stock that will be outstanding after this offering;

 

    8,000,000 shares of Class B common stock reserved as of the closing date of this offering for future issuance under our 2017 Omnibus Incentive Plan; and

 

    3,900,000 shares of Class B common stock reserved as of the closing date of this offering for future issuance under our Omnibus Long-Term Incentive Plan.

Unless we indicate otherwise or the context otherwise requires, this prospectus reflects and assumes:

 

    No exercise of the underwriters’ option to purchase additional shares of our Class B common stock;

 

    An initial public offering price of $19.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus; and

 

    The issuance of the pre-IPO split dividend on March 24, 2017, pursuant to which each of our shareholders as of the record date of March 21, 2017 will receive 29 shares of Class A or Class B Common Stock for each share of Class A or Class B Common Stock, respectively, held by the shareholder as of the record date.

 



 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our summary historical consolidated financial and other data as of and for the periods indicated. We have derived the summary historical consolidated financial data for the years ended December 31, 2016, December 31, 2015 and December 31, 2014 from the audited consolidated financial statements included elsewhere in this prospectus.

Contemporaneously with the completion of this offering, we will amend the Schneider National, Inc. Employee Stock Purchase Plan and certain agreements governing ownership of our common stock held by existing shareholders, including members of the Schneider family and their family trusts, in order to remove provisions that currently grant each of our shareholders the right to require us to repurchase our common stock held by such shareholder under certain circumstances. The as adjusted consolidated balance sheet data as of December 31, 2016 presents our consolidated balance sheet to give effect to the reclassification of our Class A and Class B common stock, which is, before giving effect to these amendments, considered redeemable under GAAP, to shareholders’ equity, including common stock and additional paid-in capital upon the elimination of the repurchase rights from the shareholders.

The summary historical consolidated financial and other data set forth below should be read in conjunction with the information included under the headings “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

 

Consolidated Statements of Income Data

($ in thousands)

   Year Ended December 31,  
   2016      2015      2014  

Operating revenue

   $ 4,045,736      $ 3,959,372      $ 3,940,576  

Operating expenses:

        

Purchased transportation

     1,465,994        1,430,164        1,384,979  

Salaries, wages, and benefits

     1,129,304        1,076,512        1,037,781  

Fuel and fuel taxes

     252,918        290,454        455,751  

Depreciation and amortization

     266,031        236,330        230,008  

Operating supplies and expenses

     449,871        452,452        435,753  

Insurance and related expenses

     89,076        82,007        62,846  

Other general expenses

     102,137        125,176        94,107  

Goodwill impairment charge

            6,037         
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     3,755,331        3,699,132        3,701,225  
  

 

 

    

 

 

    

 

 

 

Income from operations

   $ 290,405      $ 260,240      $ 239,351  

Non-operating expenses:

        

Interest expense—net

     21,376        18,730        11,732  

Other—net

     3,431        2,786        1,756  
  

 

 

    

 

 

    

 

 

 

Total non-operating expenses

     24,807        21,516        13,488  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     265,598        238,724        225,863  

Provision for income taxes

     108,747        97,792        92,295  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 156,851      $ 140,932      $ 133,568  
  

 

 

    

 

 

    

 

 

 

 



 

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Consolidated Statements of Income Per Share Data(1)

   Year Ended December 31,  
   2016      2015      2014  

Net income per share attributable to common shareholders

        

Basic

   $ 1.00      $ 0.91      $ 0.86  

Diluted

   $ 1.00      $ 0.91      $ 0.86  

Weighted average number of shares used in per share amounts

        

Basic

     156,566,057        155,289,954        154,983,767  

Diluted

     156,836,987        155,566,434        155,330,117  

Other Financial Data

($ in thousands, except per share data)

      

Adjusted income from operations(2)

   $ 293,099      $ 293,008      $ 244,276  

Adjusted EBITDA(3)

   $ 559,130      $ 529,338      $ 474,284  

Adjusted net income(4)

   $ 158,443      $ 162,740      $ 136,474  

Adjusted net income per share(1)(5)

        

Basic

   $ 1.01      $ 1.05      $ 0.88  

Diluted

   $ 1.01      $ 1.05      $ 0.88  
Operating Statistics ($)       

Truckload

        

Revenue per truck per week(6)

   $ 3,488      $ 3,520      $ 3,518  

Average trucks:(7)

        

Company

     9,026        8,536        8,336  

Owner-operator

     2,696        2,446        2,048  

Intermodal

        

Orders (in thousands)

     381.4        386.9        376.9  

Containers (at period end)

     17,653        17,397        17,280  

Revenue per order(8)

   $ 1,986      $ 2,040      $ 1,918  

 

Consolidated Balance Sheet Data

($ in thousands)

   As of December 31, 2016  
   Actual      As
Adjusted(9)
 

Cash and cash equivalents

   $ 130,787      $ 130,787  

Property and equipment (net)

     1,758,055        1,758,055  

Total assets

     3,054,641        3,054,641  

Long-term debt and obligations under capital leases

     439,627        439,627  

Temporary equity—Redeemable common stock, Class A

     563,217         

Temporary equity—Redeemable common stock, Class B

     497,175         

Accumulated earnings

     125,175         

Accumulated other comprehensive income

     883        883  

Common stock, Class A

             

Common stock, Class B

             

Additional paid-in capital

            1,060,392  

Retained earnings

            125,175  

 



 

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Cash Flow Data

 

($ in thousands)

   Year Ended December 31,  
     2016      2015     2014  

Cash provided by (used in) operating activities

   $ 455,313      $ 485,557     $ 345,749  

Cash provided by (used in) investing activities

     (513,347)        (483,302     (475,724

Cash provided by (used in) financing activities

     28,145        8,536       109,028  

 

(1) Share data gives retroactive effect to the issuance of the pre-IPO split dividend.
(2) We define “adjusted income from operations” as income from operations, adjusted to exclude certain litigation costs, goodwill impairment, acquisition costs and one-time preparation costs in connection with this offering and initiating the transition from privately held to public company status. We describe these adjustments reconciling income from operations to adjusted income from operations in the table below.

We believe that using adjusted income from operations is helpful in analyzing our performance because it removes the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Our management and our Board of Directors focus on adjusted income from operations as a key measure of our performance. We believe our presentation of adjusted income from operations is helpful to investors because it provides investors the same information that we use internally for purposes of assessing our core operating performance.

Adjusted income from operations is a non-GAAP financial measure and should not be considered as an alternative to income from operations as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP, and it should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In evaluating adjusted income from operations, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted income from operations should not be construed to imply that our future results will be unaffected by any such adjustments. Our management compensates for these limitations by primarily relying on our GAAP results in addition to using adjusted income from operations supplementally.

The following is a reconciliation of income from operations, which is the most directly comparable GAAP measure, to adjusted income from operations:

 

($ in thousands)

   Year Ended December 31,  
     2016      2015      2014  

Income from operations

   $ 290,405      $ 260,240      $ 239,351  

Litigation(a)

        26,731        4,925  

Goodwill impairment(b)

            6,037         

Acquisition and IPO costs(c)

     2,694                
  

 

 

    

 

 

    

 

 

 

Adjusted income from operations

   $ 293,099      $ 293,008      $ 244,276  

 

  (a) Costs associated with certain lawsuits challenging compliance with aspects of the Fair Labor Standards Act (FLSA).

 

  (b) As a result of our annual goodwill impairment test as of December 31, 2015, we took an impairment charge for our Asia reporting unit.

 

  (c) Costs related to the acquisitions of Watkins & Shepard and Lodeso of $1,363 and one-time preparation costs in connection with this offering and initiating the transition from privately held to public company status of $1,331.

 

(3) We define “adjusted EBITDA” as net income, plus income tax expense, interest expense and depreciation and amortization, as further adjusted to exclude other (income)/expense and certain adjustments. We describe these adjustments reconciling net income to adjusted EBITDA in the table below.

We believe that using adjusted EBITDA is helpful in analyzing our performance because it removes the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Our management focuses on adjusted EBITDA principally as a measure of our operating performance and believes that adjusted EBITDA is helpful to investors because it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We also believe adjusted EBITDA is helpful to our management and investors as a measure of comparative operating performance from period to period.

Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP, and it should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Our management compensates for these limitations by primarily relying on our GAAP results in addition to using adjusted EBITDA supplementally.

 



 

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The following is a reconciliation of net income, which is the most directly comparable GAAP measure, to adjusted EBITDA:

 

($ in thousands)

   Year Ended December 31,  
     2016      2015      2014  

Net income

   $ 156,851      $ 140,932      $ 133,568  

Provision for income taxes

     108,747        97,792        92,295  

Interest expense

     21,376        18,730        11,732  

Depreciation and amortization

     266,031        236,330        230,008  

Other non-operating expenses

     3,431        2,786        1,756  

Litigation(a)

            26,731        4,925  

Goodwill impairment(b)

            6,037         

Acquisition and IPO costs(c)

     2,694                
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 559,130      $ 529,338      $ 474,284  

 

  (a) Costs associated with certain lawsuits challenging compliance with aspects of the Fair Labor Standards Act (FLSA).
  (b) As a result of our annual goodwill impairment test as of December 31, 2015, we took an impairment charge for our Asia reporting unit.
  (c) Costs related to the acquisitions of Watkins & Shepard and Lodeso of $1,363 and preparation costs in connection with this offering and initiating the transition from privately held to public company status of $1,331.

 

(4) We define “adjusted net income” as net income, as adjusted to exclude certain litigation costs, goodwill impairment, acquisition costs and preparation costs in connection with this offering and initiating the transition from privately held to public company status. We describe these adjustments reconciling net income to adjusted net income in the table below.

We believe that using adjusted net income is helpful in analyzing our performance because it removes the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. We believe our presentation of adjusted net income is helpful to investors because it provides investors the same type of information that we use internally for purposes of assessing our core operating performance.

Adjusted net income is a non-GAAP financial measure and should not be considered as an alternative to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP, and it should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In evaluating adjusted net income, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted net income should not be construed to imply that our future results will be unaffected by any such adjustments. Our management compensates for these limitations by primarily relying on our GAAP results in addition to using adjusted net income supplementally.

The following is a reconciliation of net income, which is the most directly comparable GAAP measure, to adjusted net income:

 

($ in thousands)

   Year Ended December 31,  
     2016      2015      2014  

Net income

   $ 156,851      $ 140,932      $ 133,568  

Litigation(a)

            26,731        4,925  

Goodwill impairment(b)

            6,037         

Acquisition and IPO costs(c)

     2,694                

Income tax adjustment(d)

     (1,102)        (10,960      (2,019
  

 

 

    

 

 

    

 

 

 

Adjusted net income

   $ 158,443      $ 162,740      $ 136,474  

 

  (a) Costs associated with certain lawsuits challenging compliance with aspects of the Fair Labor Standards Act (FLSA).
  (b) As a result of our annual goodwill impairment test as of December 31, 2015, we took an impairment charge for our Asia reporting unit.
  (c) Costs related to the acquisitions of Watkins & Shepard and Lodeso of $1,363 and one-time preparation costs in connection with this offering and initiating the transition from privately held to public company status of $1,331.
  (d) Reflects an income tax adjustment calculated based on the consolidated effective tax rate on a GAAP basis, applied to the non-GAAP adjustments, unless the underlying item has a materially different tax treatment, in which case the actual or estimated tax rate applicable to the adjustment is used. The income tax adjustment rate applied was 41% for all items in 2016, 41% for all items other than goodwill (for which the rate applied was 0%) in 2015 and 41% for all items in 2014.

 

(5) Calculated as adjusted net income divided by weighted-average number of common shares outstanding during the applicable period (for basic) or the weighted-average number of diluted common shares outstanding during the applicable period (for diluted).
(6) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Indicators—Truckload Segment” for a discussion of revenue per truck per week.
(7) Average trucks is calculated based on beginning and ending month counts and represents the average number of trucks available to haul freight over a specific period of time.

 



 

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(8) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Indicators— Intermodal Segment” for a discussion of revenue per order.
(9) The consolidated balance sheet data as of December 31, 2016, as adjusted, presents our consolidated balance sheet to give effect to the reclassification of our Class A and Class B common stock, which is, before giving effect to these amendments, considered redeemable under GAAP, to shareholders’ equity, including common stock and additional paid-in capital and upon the elimination of the repurchase rights from the shareholders. Contemporaneously with the completion of this offering, we will amend the Schneider National, Inc. Employee Stock Purchase Plan and certain agreements governing ownership of our common stock held by existing shareholders, including members of the Schneider family and their family trusts, in order to remove provisions that currently grant each of our shareholders the right to require us to repurchase our common stock held by such shareholder under certain circumstances. When these repurchase rights terminate upon completion of this offering, all of our outstanding common stock will be considered shareholders’ equity rather than temporary equity under GAAP.

 



 

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RISK FACTORS

Investing in our Class B common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding whether to purchase shares of our Class B common stock. If any of the following risks are realized, our business, operating results, financial condition and prospects could be materially and adversely affected. In that event, the price of our Class B common stock could decline, and you could lose part or all of your investment.

Risks Relating to Our Business and Industry

The truckload and transportation industry is affected by economic and business risks that are largely beyond our control.

The truckload industry is highly cyclical, and our business is dependent on a number of factors that may have a negative impact on our operating results, many of which are beyond our control. A substantial portion of our freight is from customers in the general merchandise and consumer products goods industries. As such, our volumes are largely dependent on consumer spending and retail sales and our results may be more susceptible to trends in unemployment and retail sales than carriers that do not have this concentration.

We believe that some of the most significant factors beyond our control that may negatively impact our operating results are economic changes that affect supply and demand in transportation markets, such as:

 

    recessionary economic cycles, such as the period from 2007 to 2009;

 

    changes in customers’ inventory levels, including shrinking product/package sizes, and in the availability of funding for their working capital;

 

    commercial (Class A) driver shortages;

 

    industry compliance with an ongoing regulatory environment;

 

    excess truck capacity in comparison with shipping demand; and

 

    downturns in customers’ business cycles, which may be caused by declines in consumer spending.

The risks associated with these factors are heightened when the United States economy is weakened. Some of the principal risks during such times are as follows:

 

    low overall freight levels, which may impair our asset utilization;

 

    customers with credit issues and cash flow problems;

 

    changing freight patterns resulting from redesigned supply chains, resulting in an imbalance between our capacity and customer demand;

 

    customers bidding out freight or selecting competitors that offer lower rates, in an attempt to lower their costs, forcing us to lower our rates or lose freight; and

 

    more unbilled miles incurred to obtain loads.

Economic conditions that decrease shipping demand or increase the supply of capacity in the truckload transportation industry can exert downward pressure on rates and equipment utilization, thereby decreasing asset productivity. Declining freight levels and rates, a prolonged recession or general economic instability could result in declines in our results of operations, which declines may be material.

We also are subject to cost increases outside our control that could materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but are not limited to, fuel and energy

 

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prices, driver wages, taxes and interest rates, tolls, license and registration fees, insurance premiums, regulations, revenue equipment and related maintenance costs and healthcare and other benefits for our associates. We cannot predict whether, or in what form, any such cost increase or event could occur. Any such cost increase or event could adversely affect our profitability.

In addition, events outside our control, such as strikes or other work stoppages at our facilities or at customer, port, border or other shipping locations, weather, actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state or heightened security requirements could lead to reduced economic demand, reduced availability of credit or temporary closing of shipping locations or United States borders. Such events or enhanced security measures in connection with such events could impair our operations and result in higher operating costs.

The truckload and transportation industry is highly competitive and fragmented, which subjects us to competitive pressures pertaining to pricing, capacity and service.

Our operating segments compete with many truckload carriers, some LTL carriers, railroads, logistics, brokerage, freight forwarding and other transportation companies. The North American surface transportation market is highly competitive and fragmented. Some of our customers may utilize their own private fleets rather than outsourcing loads to us. Some of our competitors may have greater access to equipment, a larger fleet, a wider range of services, preferential dedicated customer contracts, greater capital resources or other competitive advantages. Numerous competitive factors could impair our ability to maintain or improve our profitability. These factors include the following:

 

    Many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth in the economy. This may make it difficult for us to maintain or increase freight rates, or may require us to reduce our freight rates. Additionally, it may limit our ability to maintain or expand our business.

 

    We recently expanded our presence in the final mile market, with our acquisition of Watkins & Shepard and Lodeso. This is a difficult to serve market and we face competition in this market from competitors that have operated in this market for several years, which may hinder our ability to compete and gain market share.

 

    Since some of our customers also operate their own private trucking fleets, they may decide to transport more of their own freight.

 

    Some shippers have selected core carriers for their shipping needs, for which we may not be selected.

 

    Many customers periodically solicit bids from multiple carriers for their shipping needs, despite the existence of dedicated contracts, which may depress freight rates or result in a loss of business to our competitors.

 

    The continuing trend toward consolidation in the trucking industry may result in more large carriers with greater financial resources and other competitive advantages, with which we may have difficulty competing.

 

    Higher fuel prices and higher fuel surcharges to our customers may cause some of our customers to consider freight transportation alternatives, including rail transportation.

 

    Advancements in technology may necessitate that we increase investments in order to remain competitive, and our customers may not be willing to accept higher freight rates to cover the cost of these investments.

 

    Competition from freight logistics and brokerage companies may negatively impact our customer relationships and freight rates.

 

    Smaller carriers may build economies of scale with procurement aggregation providers, which may improve such carriers’ abilities to compete with us.

 

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We may not be able to effectively manage and implement our organic growth strategies.

While we currently believe we can grow our profits and cash flows organically through further penetration of existing customers and by expanding our customer base, we may not be able to effectively and successfully implement such strategies and realize our stated goals. Our goals may be negatively affected by a failure to further penetrate our existing customer base, cross-sell our service offerings, pursue new customer opportunities, manage the operations and expenses of new or growing service offerings or otherwise achieve growth of our service offerings. Successful execution of our business strategies may not result in us achieving our current business goals.

Our businesses depend on our strong reputation and the value of the Schneider brand.

We believe that the Schneider brand name symbolizes high-quality service, reliability and efficiency, and is one of our most important and valuable assets. The Schneider brand name and our corporate reputation are significant sales and marketing tools, and we devote substantial resources to promoting and protecting them. Adverse publicity (whether or not justified) relating to activities by our associates, contractors or agents, such as accidents, customer service mishaps or noncompliance with laws, could tarnish our reputation and reduce the value of our brand. With the increased use of social media outlets such as YouTube, Facebook and Twitter, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to effectively respond. Damage to our reputation and loss of brand equity could reduce demand for our services and thus have an adverse effect on our financial condition, liquidity and results of operations, as well as require additional resources to rebuild our reputation and restore the value of our brand.

We have several major customers, the loss of one or more of which could have a material adverse effect on our business.

A significant portion of our operating revenue is generated from a number of major customers, the loss of one or more of which could have a material adverse effect on our business. For fiscal year 2016, our largest customer accounted for less than 10% of our operating revenue. Additionally, our top 20 customers accounted for approximately 41% of our adjusted enterprise revenue (excluding fuel surcharge), our top 10 customers accounted for approximately 30% of our adjusted enterprise revenue (excluding fuel surcharge), and our top 5 customers accounted for approximately 22% of our adjusted enterprise revenue (excluding fuel surcharge). Economic and capital markets conditions may adversely affect our customers and their ability to remain solvent. Our customers’ financial difficulties can negatively impact our business and operating results and financial condition. Generally, we do not have contractual relationships with our customers that guarantee any minimum volumes, and our customer relationships may not continue as presently in effect. We generally do not have long-term contractual relationships with our customers, including our dedicated customers, and certain of these contracts contain clauses that permit cancellation on a short-term basis without cause, and accordingly any of our customers may not continue to utilize our services, renew our existing contracts or continue at the same volume levels. Despite the existence of contract arrangements with our customers, certain of our customers may nonetheless engage in competitive bidding processes that could negatively impact our contractual relationship. In addition, certain of our major customers may increasingly use their own truckload and delivery fleets, which would reduce our freight volumes. A reduction in or termination of our services by one or more of our major customers could have a material adverse effect on our business and operating results.

Our profitability may be materially adversely impacted if our capital investments do not match customer demand for invested resources or if there is a decline in the availability of funding sources for these investments.

Our operations require significant investments. The amount and timing of capital investments depend on various factors, including anticipated volume levels and the price and availability of assets. If anticipated demand differs materially from actual usage, our capital-intensive truckload segment may have too much or too little

 

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capacity. Moreover, across our three reportable segments resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to properly select freight and adapt to changes in customer transportation requirements is important to efficiently deploy resources and make capital investments in trucks, trailers, containers and chassis (with respect to our truckload and intermodal segments) or obtain qualified third-party capacity at a reasonable price (with respect to our logistics segment). Although our business volume is not highly concentrated, our customers’ financial failures or loss of customer business may also affect us.

We may not be able to successfully implement our company enterprise strategy of diversifying our revenue base and expanding our capabilities.

Our company enterprise strategy entails selectively diversifying our revenue base, as we have done, by entering the over-dimensional consumer freight market, increasingly becoming part of the e-commerce supply chain and growing our market share in specialty equipment services. This strategy involves certain risks, and we may not overcome these risks, in which case our business, financial position and operating results could be materially and adversely affected. In connection with our company enterprise strategy, we have in the past made selective acquisitions, made new investments in technology and in office, service and warehouse centers, increased sales and marketing efforts and hired new drivers and associates. We expect to continue to pursue our company enterprise strategy, and this exposes us to certain risks, including:

 

    making significant capital expenditures, which could require substantial capital and cash flow that we may not have or may not be able to obtain on satisfactory terms;

 

    growth may strain our management, capital resources, information systems and customer service;

 

    hiring new managers, drivers and other associates, including in specialty equipment services, may increase training and compliance costs and may result in temporary inefficiencies until those associates become proficient in their jobs;

 

    specialty transport of bulk chemicals and other hazardous materials, which subjects us to environmental, health and safety laws and regulations by governmental authorities and, in the event of an accidental release of these commodities, could result in significant loss of life and extensive property damage as well as environmental remediation obligations; and

 

    expanding our service offerings may require us to encounter new competitive challenges in markets in which we have not previously operated or with which we are unfamiliar.

Fluctuations in the price or availability of fuel, the volume and terms of diesel fuel purchase commitments and surcharge collection may increase our costs of operation, which could materially and adversely affect our margins.

Fuel represents a significant expense for us. Diesel fuel prices fluctuate greatly due to factors beyond our control, such as political events, terrorist activities, armed conflicts, depreciation of the dollar against other currencies and weather, such as hurricanes, and other natural or man-made disasters, each of which may lead to an increase in the cost of fuel. Fuel prices also are affected by the rising demand in developing countries, and could be adversely impacted by diminished drilling activity and by the use of crude oil and oil reserves for other purposes. Such events may lead not only to increases in fuel prices, but also to fuel shortages and disruptions in the fuel supply chain. Because our operations are dependent upon diesel fuel, and a portion of our business is based on fuel purchased on the spot market at prevailing market rates, significant diesel fuel cost increases, shortages or supply disruptions could materially and adversely affect our operating results and financial condition.

Increases in fuel costs, to the extent not offset by rate per mile increases or fuel surcharges, have an adverse effect on our operations and profitability. While a portion of our fuel costs are covered by pass-through

 

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provisions in customer contracts and compensatory fuel surcharge programs, we also incur fuel costs that cannot be recovered even with respect to customers with which we maintain fuel surcharge programs, such as those associated with unbilled miles, or the time when our engines are idling. Because our fuel surcharge recovery lags behind changes in fuel prices, our fuel surcharge recovery may not capture the increased costs we pay for fuel, especially when prices are rising, leading to fluctuations in our levels of reimbursement. Our levels of reimbursement have fluctuated in the past. Further, during periods of low freight volumes, shippers can use their negotiating leverage to impose less compensatory fuel surcharge policies. In addition, the terms of each customer’s fuel surcharge agreement vary, and customers may seek to modify the terms of their fuel surcharge agreements to minimize recoverability for fuel price increases. Such fuel surcharges may not be maintained indefinitely or may not be sufficiently effective. As of December 31, 2016, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

Difficulties attracting and retaining qualified drivers, including through owner-operators, could materially adversely affect our profitability and ability to maintain or grow our fleet.

Like many truckload carriers, from time to time we may experience difficulty in attracting and retaining sufficient numbers of qualified drivers, including through owner-operators, and driver shortages may recur in the future. Our challenge with attracting and retaining qualified drivers stems from intense market competition and our driver quality standards, which subjects us to increased payments for driver compensation and owner-operator contracted rates. Our specialty equipment services require special training to handle unique operating requirements. We use physical function tests and hair follicle and urine testing to screen and test all driver applicants, which we believe is a rigorous standard relative to others in our industry and could decrease the pool of qualified applicants available to us. Failure to recruit high-quality, safe drivers that meet our testing standards could diminish the safety of our fleet and could have a materially adverse effect on our customer relationships and our business.

Our company drivers are generally compensated on a per-mile basis, and the rate per-mile generally increases with the drivers’ length of service. Owner-operators contracting with us are generally compensated on a percentage of revenue basis. The compensation we offer our drivers and owner-operators is also subject to market conditions and labor supply. We may in future periods increase company driver and owner-operator compensation, which will be more likely to the extent that economic conditions improve and industry regulation exacerbates driver shortages forcing driver compensation higher. The recent electronic logging device regulations, requiring compliance by nearly all carriers by December of 2017, are expected to further tighten the market for eligible drivers. In addition to involuntary associate terminations, our company driver voluntary turnover rate throughout 2016 was approximately 88%, and like most in our industry, we suffer from a high turnover rate of company drivers, especially in the first 90 days of employment. Our turnover rate requires us to continually recruit a substantial number of company drivers in order to operate our revenue-producing fleet equipment, including trucks, chassis and specialty equipment. If we are unable to continue to attract and retain a sufficient number of high-quality company drivers, and contract with suitable owner-operators, we could be required to adjust our compensation packages, or operate with fewer trucks and face difficulty meeting shipper demands, all of which could adversely affect our profitability and ability to maintain our size or grow.

Our use of owner-operators to provide a portion of our truck fleet exposes us to different risks than we face with our owned trucks.

We may contract with more owner-operators and use more owner-operator trucks than some of our competitors. We are therefore more dependent on owner-operator trucks than some of our competitors. Failure to maintain owner-operator business and relationships and increased industry competition for owner-operators could have a materially adverse effect on our operating results.

During times of increased economic activity, we face heightened competition for owner-operators from other carriers. To the extent our turnover increases, we may be required to increase owner-operator compensation

 

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or take other measures to remain an attractive option for owner-operators. If we cannot attract sufficient owner-operators, or it becomes economically difficult for owner-operators to survive, we may not be able to maintain the percentage of our fleet provided by owner-operators or maintain our delivery schedules.

We provide financing to certain qualified owner-operators who qualify for financing in order to lease trucks from us. If we are unable to provide such financing in the future, due to liquidity constraints or other restrictions, we may experience a decrease in the number of owner-operators available to fully operate our assets. Further, if owner-operators operating the trucks we finance default under or otherwise terminate the financing arrangement and we are unable to find a replacement owner-operator, we may incur losses on amounts owed to us with respect to the truck in addition to any losses we may incur as a result of idling the truck.

Our lease contracts with owner-operators are governed by the federal and other leasing regulations, which impose specific requirements on us and owner-operators. It is possible that we could face lawsuits alleging the violation of leasing obligations or failure to follow the contractual terms, which could result in liability.

We utilize owner-operators to complete our services. These owner-operators are subject to similar regulation requirements, such as the electronic on-board recording and driver Hours of Service (HOS) requirements that apply to larger carriers, which may have a more significant impact on their operations, causing them to exit the transportation industry. Aside from when these third parties may use our trailing equipment to fulfill loads, we do not own the revenue equipment or control the drivers delivering these loads. The inability to obtain reliable third-party owner-operators could have a material adverse effect on our operating results and business growth.

We depend on railroads in the operation of our intermodal business and therefore our ability to offer intermodal services could be limited if we experience instability from third parties we use in that business.

Our intermodal segment utilizes railroads in the performance of its transportation services. The majority of these services are provided pursuant to contractual relationships with the railroads. While we have agreements with a number of Class I railroads, the majority of our business travels on the Burlington Northern Santa Fe (BNSF) and the CSX Transportation (CSX) railways, with which we have established relationships. One of our competitors has a preferential contractual arrangement with BNSF, which limits the market share and relative profitability of the services we provide through BNSF. We are currently in negotiations with CSX with respect to renewal of our contract, and there is no guarantee that these negotiations will be successful. Our intermodal business may be affected by any adverse change to relationships with railroad service providers upon the expiration or renewal of such contracts.

Pricing arrangements with these Class I Railroads generally permit pricing to be adjusted based on market conditions and an adverse change in future market conditions could adversely affect pricing. In addition, a material change in the relationship with or the inability to utilize one or more of these railroads could have a material adverse effect on our business and operating results. Future declines in overall service and volume levels provided by these railroads could have a material adverse effect on our intermodal segment. In addition, a portion of the freight we deliver through both our intermodal and trucking segments is imported to the United States through ports of call that are subject to labor union contracts. Work stoppages or other disruptions at any of these ports could have a material adverse effect on our business.

We depend on third-party capacity providers for logistics brokerage business, and service instability from these providers could limit growth and profitability of our logistics segment, which could adversely affect our revenue, operating results and customer relationships.

Our brokerage business is dependent upon the services of third-party capacity providers, including other truckload carriers. These third-party providers may seek other freight opportunities and may require increased

 

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compensation in times of improved freight demand or tight trucking capacity. Our third-party truckload carriers may also be affected by certain factors to which our drivers and owner-operators are subject, including, but not limited to, driver shortage, alternative employment opportunities, varying freight market conditions, high capital expenditures and trucking industry regulations. Most of our third-party capacity provider transportation services contracts are cancelable on a short-term basis without cause. Our inability to secure the services of these third-parties, or increases in the prices we must pay to secure such services, could have an adverse effect on our operations and profitability to the extent we are not able to obtain corresponding customer rate increases.

We currently depend on intermodal chassis rented to us by a third-party and our plan to convert our intermodal chassis supply to an ownership model will result in significant one-time costs and adversely affect our operating results if not executed successfully.

A significant percentage of the chassis currently utilized in our intermodal business are rented from a single company, which results in costs relating to lease, maintenance and repair and puts us at a competitive disadvantage. We expect to convert our rented intermodal chassis model to an ownership model to achieve cost savings, including by improving chassis quality. The expected timing for completion of this conversion process is constrained by our current chassis rental contract and may lead to significant one-time costs through fiscal year 2017 resulting from conversion costs, such as the purchase of the chassis that we will own, in addition to continuing payments under our existing chassis rental contract (which is set to expire during this fiscal year). Our conversion of our rented intermodal chassis model to an ownership model to improve cost savings may not be successful and therefore could adversely affect our operating results.

If our third-party logistics customers are able to reduce their total cost structure and improve their internal logistics operations and transportation services, our third-party logistics business and operating results may be materially adversely effected.

A major driver for customers to use third-party logistics providers instead of their own personnel is their inherent high cost and difficulty in attaining logistics expertise and operational efficiencies. Our third-party logistics service is generally able to provide such services more efficiently than otherwise could be provided “in-house,” primarily as a result of our technological efficiencies, lower and more flexible associate cost structure and our existing industry relationships and expertise. If, however, our third-party logistics customers are able to reduce their in-house logistics cost structures, especially by reducing associate costs, we may not be able to provide our customers with an attractive alternative for their logistics needs and our third-party logistics business and operating results may be materially adversely effected.

Difficulty in obtaining material, equipment, goods and services from our vendors and suppliers could adversely affect our business.

We are dependent upon our suppliers for certain products and materials, including our trucks, trailers, chassis and containers. We manage our over-the-road fleet to a 5 year trade cycle with the current average age-of-fleet of our sleeper cab tractors at approximately 2.6 years. Accordingly, we rely on suppliers of our trucks and truck components to maintain the age of our fleet. We believe that we have positive relationships with our vendors and suppliers and are generally able to obtain favorable pricing and other terms from such parties. If we fail to maintain these relationships with our vendors and suppliers, or if our vendors and suppliers are unable to provide the products and materials we need or undergo financial hardship, we could experience difficulty in obtaining needed goods and services because of production interruptions, limited material availability or other reasons. Subsequently, our business and operations could be adversely affected.

If we are unable to recruit, develop and retain our key associates, our business, financial condition and operating results could be adversely affected.

We are highly dependent upon the services of certain key employees, including our team of executive officers and managers. We currently do not have employment agreements with any of our executive officers, and

 

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the loss of any of their services could negatively impact our operations and future profitability. Inadequate succession planning or unexpected departure of key executive officers could cause substantial disruption to our business operations, deplete our institutional knowledge base and erode our competitive advantage. Additionally, we must continue to recruit, develop and retain skilled and experienced service center managers if we are to realize our goal of expanding our operations and continuing our growth, including internationally. Failure to recruit, develop and retain a core group of service center managers could have a materially adverse effect on our business.

Efforts by labor unions could divert management’s attention and could have a materially adverse effect on our operating results.

We face the risk that Congress or one or more states will approve legislation significantly affecting our business and our relationship with our associates, such as the previously proposed federal legislation referred to as the Employee Free Choice Act, which would substantially liberalize the procedures for union organization. We also face the risk that our associates, including drivers, may attempt to organize. Currently, thirteen of our company drivers are members of an organized labor union as a result of a commitment from the 1980s to allow this group of drivers to finish their careers with Schneider. Any attempt to organize by our associates could result in increased legal and other associated costs. In addition, if we were to enter into a collective bargaining agreement, the terms could negatively affect our costs, efficiency and ability to generate acceptable returns on the affected operations. Moreover, any labor disputes or work stoppages, whether or not our other associates unionize, could disrupt our operations and reduce our revenues.

Insurance and claims expenses could significantly reduce our earnings.

Our future insurance and claims expense might exceed historical levels, which could reduce our earnings. We self-insure or maintain a high deductible for a portion of our claims exposure resulting from workers’ compensation, auto liability, general liability, cargo and property damage claims, as well as associate health insurance. Estimating the number and severity of claims, as well as related judgment or settlement amounts is inherently difficult. This, along with legal expenses, incurred but not reported claims and other uncertainties can cause unfavorable differences between actual claim costs and our reserve estimates. We reserve for anticipated losses and expenses and periodically evaluate and adjust our claims reserves to reflect our experience. However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts.

We maintain insurance with licensed insurance carriers above the amounts which we retain. Although we believe our aggregate insurance limits should be sufficient to cover reasonably expected claims, it is possible that the amount of one or more claims could exceed our aggregate coverage limits. If any claim were to exceed our coverage, we would bear the excess, in addition to our other self-insured/retained amounts. Insurance carriers have raised premiums for many businesses, including transportation companies. As a result, our insurance and claims expense could increase, or we could raise our self-insured retention or deductible when our policies are renewed or replaced. Our operating results and financial condition could be materially and adversely affected if (i) cost per claim, premiums, or the number of claims significantly exceeds our estimates, (ii) we experience a claim in excess of our coverage limits, (iii) our insurance carriers fail to pay on our insurance claims or (iv) we experience a claim for which coverage is not provided.

Insuring risk through our captive insurance company could adversely impact our operations.

We insure a significant portion of our risk through our wholly owned and consolidated captive insurance company, INS Insurance, Inc. (INS). In addition to insuring portions of our own risk, INS provides insurance coverage to owner-operators. Our captive insurance company accesses the reinsurance markets and may increase retention amounts to offset the insurance market pressures, which could expose us to volatility in claims expenses.

 

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To comply with certain state insurance regulatory requirements, cash and cash equivalents must be paid to INS as capital investments and to cover insurance premiums, which deployed assets may be restricted as collateral for anticipated losses. In addition, we must deploy from our balance sheet the restricted cash used for payment of insured claims. In the future, we may continue to insure our risk through our captive insurance subsidiary, which may cause increases in the required amount of our restricted cash or other collateral, such as letters of credit. Significant increases in the amount of collateral required by third-party insurance carriers and regulators would reduce our liquidity and could adversely affect our results of operations.

Our captive insurance company is subject to substantial government regulation.

Our captive insurance company is domiciled in Vermont and regulated by state authorities. State regulations generally provide protection to policy holders, rather than shareholders, and generally involve:

 

    approval of premium rates for insurance;

 

    standards of solvency;

 

    minimum amounts of statutory capital surplus that must be maintained;

 

    limitations on types and amounts of investments;

 

    regulation of dividend payments and other transactions between affiliates;

 

    regulation of reinsurance;

 

    regulation of underwriting and marketing practices;

 

    approval of policy forms;

 

    methods of accounting; and

 

    filing of annual and other reports with respect to financial condition and other matters.

These regulations may increase our costs of regulatory compliance, limit our ability to change premiums, restrict our ability to access cash held in our captive insurance companies and otherwise impede our ability to take actions we would otherwise take.

We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future federal or state regulations could have a materially adverse effect on our business.

We are subject to regulation at the federal level and at the state level. We may incur additional expenses associated with state wage, driver meal and rest break regulation such as that which has been enacted in California. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, we operate in the United States pursuant to federal operating authority granted by the DOT. Our company drivers and owner-operator drivers with whom we contract also must comply with the safety and fitness regulations of the DOT, implemented through the Federal Motor Carrier Safety Administration (FMCSA), including those relating to CSA safety performance and measurements, drug and alcohol testing and Hours of Service (HOS). Weight and equipment dimensions also are subject to government regulations. We also may become subject to new or more restrictive regulations relating to exhaust emissions, drivers’ Hours of Service (HOS), ergonomics, collective bargaining, security at ports and other matters affecting safety or operating methods. In addition, FMCSA published the notice of proposed rulemaking regarding how carriers are assigned their “safety fitness” score in January 2016. See “Business—Regulation—Safety Fitness Determination.” Under the proposed rule, the current three tier system that requires an audit to occur in order for a rating to be issued would be replaced by a new system that would only indicate those carriers that are unfit. The new system would continue to use comprehensive audits but also allow for ratings to be based on CSA scores which are derived from roadside inspection and crash performance to determine which carriers are unfit to operate based on their performance against fixed thresholds. In order to be deemed unfit using CSA scores a carrier would have to be failing in 2 or more BASICs. We are still awaiting the final rule which is not expected until late 2017 or 2018. FMCSA estimates that the proposed rule would increase the number of motor carriers determined to be unfit by more than two and a half times. Future CSA rulemaking could adversely affect us, including our ability to maintain or grow our fleet as well as our customer relationships.

 

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In December 2015, the FMCSA final rule related to mandatory use of electronic logging devices was published, and requires the use of electronic logging devices by nearly all carriers by December 10, 2017. All of our trucks, including all the owner-operator trucks used by us, are currently equipped with EOBRs. Nonetheless, we believe this electronic logging device regulation may exacerbate the driver shortage, tighten truck capacity and disproportionately impact relatively smaller carriers by reducing available driving time. There can be no guarantee that despite our current fleet-wide use of EOBRs, that upon enforcement of the electronic logging device regulation we will be found by enforcement authorities to be compliant with the electronic logging device rule in all respects. In addition, the implementation of the electronic logging device final rule is being contested in federal court by parties opposed to the rule. Federal law also requires major freight and commuter railroads to install and maintain new safety technology known as Positive Train Control, which is complex and can be costly to implement, and therefore may adversely affect our railroad partners and in turn have a materially adverse effect on operating results of our intermodal business. In September 2016, the National Highway Traffic Safety Administration (NHTSA) and FMCSA proposed regulations that would require vehicles of a certain size to be equipped with a speed limiting device set to a speed to be specified. There can be no guarantee as to whether a final rule requiring speed limiting devices will be implemented, and if so the nature of any such rule and its impact on our fleet and operations.

In 2008 the State of California’s Air Resources Board (ARB) approved the Heavy-Duty Vehicle Greenhouse Gas (GHG) Emission Reduction Regulation in efforts to reduce GHG emissions from certain long-haul tractor-trailers that operate in California by requiring them to utilize technologies that improve fuel efficiency (regardless of where the vehicle is registered). The regulation required owners of long-haul tractors and 53-foot trailers to replace or retrofit their vehicles with aerodynamic technologies and low rolling resistance tires. The regulation also contained certain emissions and registration standards for temperature controlled trailer operators. In December 2013, California’s ARB approved regulations to align its GHG emission standards and test procedures, as well as its tractor-trailer GHG regulation, with the federal Phase 1 GHG regulation, which applied fuel efficiency standards to vehicles for model years 2014-2018. In June 2015, the Environmental Protection Agency (EPA) and NHTSA, working in concert with California’s ARB, formally announced a proposed national program establishing Phase 2 of the GHG emissions and fuel efficiency standards for medium- and heavy-duty vehicles for model year 2018 and beyond.

In October 2016, the EPA and NHTSA formally published the Final Rule for Phase 2 of the GHG emissions and fuel efficiency standards for medium and heavy-duty engines and vehicles. The Final Rule, which became effective as of December 27, 2016, is expected by the EPA to lower CO2 emissions by 1.1 billion metric tons and reduce oil consumption by up to 2 billion barrels over the lifetime of the vehicles sold under the Phase 2 program. As expected, first-time GHG and fuel efficiency standards for trailers will start in model year 2018 for EPA and model year 2021 for NHSTA, and CO2 and fuel consumption standards for combination tractors and engines (which are subject to individual and separate regulatory requirements) commence in model year 2021, increase incrementally in model year 2024 and achieve a fully phased-in requirement by model year 2027. EPA and NHSTA expect that motor carriers will meet the increased standards through the use of technology improvements in multiple areas, including the engine, transmission, driveline, aerodynamic design, extended idle reduction technologies and the use of other accessories. These regulations could adversely affect us by increasing the cost of new trucks, impairing productivity and increasing our operating expenses.

In addition to the United States, we also have the authority to operate in Mexico, various Canadian provinces and China. We, as well as our drivers and owner-operators, must comply with enacted governmental regulations regarding safety, equipment, environmental protection and operating methods. Examples include regulation of equipment weight, equipment dimensions, fuel emissions, driver Hours of Service (HOS), driver eligibility requirements, on-board reporting of operations and ergonomics. We may also become subject to new or more restrictive regulations related to safety or operating methods, which could adversely affect our fleet and operations in those jurisdictions.

 

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If current or future legislation or judicial decisions deem that independent contractors (owner-operators) or contingent workers are equivalent to employees, we would incur more employee-related expenses.

We face a complex and increasingly stringent regulatory and statutory scheme relating to wages, classification of employees and alternate work arrangements. Tax, federal and other regulatory authorities and private plaintiffs have argued that owner-operator drivers in the trucking and transportation industries are employees, rather than independent contractors. In April 2010, federal legislation was proposed that increased the recordkeeping requirements for companies that engage independent contractors and heightened the penalties to employers that misclassify individuals or violate overtime and/or wage requirements. There have been and may continue to be lawsuits concerning the appropriate worker classification of individuals that provide delivery services and the outcomes of such cases may be adverse to us. Further, class actions and other lawsuits have been filed against us and others in our industry seeking to reclassify owner-operator drivers as employees for a variety of purposes, including workers’ compensation and health care coverage. If any such cases are judicially determined in a manner adverse to us or our businesses, there could be an adverse impact on our operations in the effected jurisdictions. Taxing and other regulatory authorities and courts apply a variety of standards in their determination of independent contractor status. If the owner-operator drivers we contract with are deemed employees, we would incur additional exposure under laws for federal and state tax, workers’ compensation, unemployment benefits, labor, employment and tort. The exposure could include prior period compensation, as well as potential liability for employee benefits and tax withholdings.

Our operations in Mexico, Canada and China, including our cross-border operations with Canada and Mexico, make us vulnerable to risks associated with doing business in foreign countries.

As a result of our operations in Mexico, Canada and China, including our cross-border intermodal operations with Canada and Mexico, we are subject to certain risks inherent in doing business abroad, including:

 

    exposure to local economic and political conditions (for example, total freight value to and from both Mexico and Canada fell 10.7% from October 2014 to October 2015 in part as a result of lower crude oil prices);

 

    foreign exchange rate fluctuations and currency controls (for example, the recent weakening of the Canadian dollar relative to the U.S. dollar, as well as fluctuations in the Mexican peso and the Chinese yuan relative to the U.S. dollar);

 

    withholding and other taxes on remittances and other payments by subsidiaries;

 

    difficulties in enforcing contractual obligations and intellectual property rights;

 

    investment restrictions or requirements; and

 

    export and import restrictions.

In addition, if we are unable to maintain our C-TPAT, Free and Secure Trade (FAST) and Partners in Protection (PIP) status, we may have significant border delays. This could cause our Mexican and Canadian operations to be less efficient than those of competitor truckload carriers that have such status and operate in Mexico or Canada. We also face additional risks associated with our foreign operations, including restrictive trade policies and imposition of duties, taxes or government royalties imposed by the Mexican or Canadian government, to the extent not preempted by the terms of the North American Free Trade Agreement. In addition, changes to the North American Free Trade Agreement or other treaties governing our business could adversely impact our international business. Failure to comply with trade compliance laws and regulations applicable to our international operations may subject us to liability.

Changes in U.S. tax laws and regulations may impact our effective tax rate and may adversely affect our business, financial condition and operating results.

Significant reform of the U.S. tax laws, including significant changes related to federal tax rates, interest expense deductions, capital expenditure deductions and the taxation of business entities, could adversely affect

 

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us. We benefit from certain tax provisions relating to capital expenditure deductions. Reform could have a material adverse effect on our growth opportunities, business and results of operations.

Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

We are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous materials, waste and other oil, fuel storage tanks, air emissions from our vehicles and facilities, engine idling and discharge and retention of storm water. Our truck terminals often are located in industrial areas where groundwater or other forms of environmental contamination could occur. Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous waste disposal, among others. Certain of our facilities have waste oil or fuel storage tanks and fueling islands. If we are involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances we transport, if soil or groundwater contamination is found at our facilities or results from our operations, or if we are found to be in violation of applicable environmental laws or regulations, we could owe cleanup costs and incur related liabilities, including substantial fines or penalties or civil and criminal liability, any of which could have a materially adverse effect on our business and operating results.

EPA regulations limiting exhaust emissions became more restrictive in 2010. In 2010, an executive memorandum was signed directing the NHTSA and the EPA to develop new, stricter fuel efficiency standards for heavy trucks. In 2011, the NHTSA and the EPA adopted final rules that established the first-ever fuel economy and greenhouse gas standards for medium-and heavy-duty vehicles. These standards apply to model years 2014 to 2018, which are required to achieve an approximate 20 percent reduction in fuel consumption by model year 2018, and equates to approximately four gallons of fuel for every 100 miles traveled. In June 2015, the EPA and NHTSA jointly proposed new stricter standards that would apply to trailers beginning with model year 2018 and tractors beginning with model year 2021.

In October 2016, the EPA and NHTSA formally published the Final Rule for Phase 2 of the GHG emissions and fuel efficiency standards for medium and heavy-duty engines and vehicles. See “—We operate in a highly regulated industry and increased costs of compliance with, or liability for violation of, existing or future federal or state regulations could have a materially adverse effect on our business.”

We have significant ongoing capital requirements that could affect our profitability if we are unable to generate sufficient cash from operations or obtain financing on favorable terms.

The truckload industry generally, and our trucking and intermodal segments in particular, are capital intensive and asset heavy, and our policy of maintaining a young, technology-equipped fleet requires us to expend significant amounts in capital expenditures annually. We expect to pay for projected capital expenditures with cash flows from operations, proceeds from equity sales or financing available under our existing debt instruments. Our total capital expenditures in fiscal year 2016 were $537 million. If we were unable to generate sufficient cash from operations, we would need to seek alternative sources of capital, including financing, to meet our capital requirements. In the event that we are unable to generate sufficient cash from operations or obtain financing on favorable terms in the future, we may have to limit our fleet size, enter into less favorable financing arrangements or operate our revenue equipment for longer periods, any of which could have a materially adverse effect on our profitability.

The seasonal pattern generally experienced in the trucking industry may affect our periodic results during traditionally slower shipping periods and winter months.

In the trucking industry, revenue generally follows a seasonal pattern which may affect our operating results. We typically experience a seasonal surge in sales during the fourth quarter of our fiscal year as a result of holiday sales. After the December holiday season and during the remaining winter months, our freight volumes

 

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are typically lower because some customers reduce shipment levels. Our operating expenses have historically been higher in the winter months because of cold temperatures and other adverse winter weather conditions which result in decreased fuel efficiency, increased cold weather-related maintenance costs of revenue equipment and increased insurance and claims costs. Revenue can also be affected by adverse weather conditions, holidays and the number of business days during a given period because revenue is directly related to the available working days of shippers. From time to time, we may also suffer short-term impacts from severe weather and similar events, such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes, and explosions that could harm our results of operations or make our results of operations more volatile.

We are increasingly dependent on data networks and systems, including tracking and communications systems, and significant systems disruptions, including those caused by cybersecurity breaches, could adversely affect our business.

Our policy of increasingly using technology to improve productivity and reduce costs through our Quest platform means that our business is reliant on the efficient, stable and uninterrupted operation of our data networks and systems, including tracking and communications systems. Our computer systems and telematics technology are used in various aspects of our business, including load planning and receiving, dispatch of drivers and third-party capacity providers, freight and container tracking, customer billing and account monitoring, automation of tasks, producing financial and other reports and other general functions and purposes. We are currently dependent on a single vendor for asset management, driver communication and critical load planning data. If the stability or capability of such vendor is compromised, it could adversely affect our revenue, customer service, driver turnover rates and data preservation. Additionally, if any of our critical information or communications systems fail or become unavailable, we could have to perform certain functions manually, which could temporarily affect the efficiency and effectiveness of our operations.

Our operations and those of our technology and communications service providers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, internet failures, computer viruses, malware, hacking and other events beyond our control. More sophisticated and frequent cyber-attacks within the United States in recent years have also increased security risks associated with information technology systems. Although we maintain information security processes and policies to protect our information, computer systems and data from cybersecurity threats, breaches and other such events, we have experienced cyber-attacks in the past that we were able to mitigate without any material adverse effect on our business and results of operations. In an attempt to reduce the risk of disruption to our business operations should a disaster occur, we have redundant computer systems and networks and the capability to deploy these backup systems from an off-site alternate location. We believe that any such disruption would be minimal, moderate or temporary. However, we cannot predict the likelihood or extent to which such alternate location or our information and communication systems would be affected. Our business and operations could be adversely affected in the event of a system failure, disruption or security breach that causes a delay, interruption or impairment of our services and operations.

Historically we have not made a significant number of acquisitions and we may not make acquisitions in the future, or if we do, we may not be successful in integrating the acquired company, either of which could have a materially adverse effect on our business.

Historically, acquisitions have not been a significant part of our growth strategy. From 2008 to 2015 we did not complete any significant acquisitions. We may not be successful in identifying, negotiating or consummating any future acquisitions. In 2016, we acquired Watkins & Shepard and Lodeso, and we may not successfully integrate these businesses or achieve the synergies and operating results anticipated in connection with these acquisitions. The continuing trend toward consolidation in the trucking industry may result in the acquisitions of smaller carriers by large carriers that gain market share and other competitive advantages through such acquisitions. If we fail to make or successfully execute future acquisitions, our growth rate could be materially and adversely affected.

 

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In addition, any acquisitions we undertake could involve numerous risks that could have a materially adverse effect on our business and operating results, including:

 

    difficulties in integrating the acquired company’s operations and in realizing anticipated economic, operational and other benefits in a timely manner that could result in substantial costs and delays or other operational, technical or financial problems;

 

    challenges in achieving anticipated revenue, earnings or cash flows;

 

    assumption of liabilities that may exceed our estimates or what was disclosed to us;

 

    the diversion of our management’s attention from other business concerns;

 

    the potential loss of customers, key associates and drivers of the acquired company;

 

    difficulties operating in markets in which we have had no or only limited direct experience;

 

    the incurrence of additional indebtedness; and

 

    the issuance of additional shares of our common stock, which would dilute your ownership in the company.

We are subject to various claims and lawsuits in the ordinary course of business, and increases in the amount or severity of these claims and lawsuits could adversely affect us.

We are exposed to various claims and litigation related to commercial disputes, personal injury, property damage, environmental liability and other matters. Proceedings include claims by third parties, and certain proceedings have been certified or purport to be class actions. Developments in regulatory, legislative or judicial standards, material changes to litigation trends, or a catastrophic accident or series of accidents, including railroad derailments that afflict our intermodal railroad operating partners, involving any or all of property damage, personal injury, and environmental liability could have a material adverse effect on our operating results, financial condition and liquidity.

We may need to obtain additional financing which may not be available or, if it is available, may result in a reduction in the percentage ownership of our then-existing shareholders.

We may need to raise additional funds in order to:

 

    finance unanticipated working capital requirements or refinance existing indebtedness;

 

    develop or enhance our technological infrastructure and our existing products and services;

 

    fund strategic relationships;

 

    respond to competitive pressures; and

 

    acquire complementary businesses, technologies, products or services.

Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion strategy, take advantage of unanticipated opportunities, develop or enhance technology or services or otherwise respond to competitive pressures could be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our then-existing shareholders may be reduced, and holders of these securities may have rights, preferences or privileges senior to those of our then-existing shareholders.

Our existing and future indebtedness could limit our flexibility in operating our business or adversely affect our business and our liquidity position.

As of December 31, 2016, we had $699 million in aggregate principal amount of indebtedness for borrowed money outstanding, consisting of $500 million outstanding under our senior notes, $135 million of borrowings outstanding under our accounts receivable securitization facility, $49 million in equipment financing notes outstanding and $15 million in obligations outstanding under capital leases.

 

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Our indebtedness may increase from time to time in the future for various reasons, including fluctuations in operating results, capital expenditures and potential acquisitions.

Any indebtedness we incur and restrictive covenants contained in the agreements related thereto could:

 

    make it difficult for us to satisfy our obligations, including making interest payments on our debt obligations;

 

    limit our ability to obtain additional financing to operate our business;

 

    require us to dedicate a substantial portion of our cash flow to payments on our debt, reducing our ability to use our cash flow to fund capital expenditures and working capital and other general operational requirements;

 

    limit our flexibility to plan for and react to changes in our business;

 

    place us at a competitive disadvantage relative to some of our competitors that have less, or less restrictive, debt than us;

 

    limit our ability to pursue acquisitions; and

 

    increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates or a downturn in our business or the economy.

The occurrence of any one of these events could have a material adverse effect on our business, financial condition and operating results or cause a significant decrease in our liquidity and impair our ability to pay amounts due on our indebtedness. Significant repayment penalties may limit our flexibility.

In addition, our credit facility contains, among other things, restrictive covenants that limit our and our subsidiaries’ ability to finance future operations or capital needs or to engage in other business activities. The credit facility restricts, among other things, our ability and the ability of our subsidiaries to incur additional indebtedness or issue guarantees, create liens on our assets make distributions on or redeem equity interests, make investments, transfer or sell properties or other assets and engage in mergers, consolidations or acquisitions. In addition, our credit facility requires us to meet specified financial ratios and tests.

We may be exposed to interest rate risk with regard to any indebtedness outstanding under our revolving credit facility.

The interest rate under the credit agreement governing our revolving credit facility is based on the Prime Rate, the Federal Funds Rate or LIBOR, depending upon the specific type of borrowing, plus an applicable margin. To the extent we incur borrowings under our revolving credit facility, increases in any of these rates may increase our interest expense relating to these borrowings. As a result, we are exposed to interest rate risk. If interest rates were to increase, our debt service obligations could increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. We are not a party to an interest rate swap contract or other derivative instrument designed to hedge our exposure to interest rate fluctuation risk.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business.

Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the Securities and Exchange Commission (SEC). Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us and could have a negative effect on our business, financial condition and operating results.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, which we refer to herein as the Exchange Act, and the requirements of the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act

 

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requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we may need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join the company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and operating results.

We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

Risks Relating to This Offering and Ownership of Our Class B Common Stock

The dual class structure of our common stock has the effect of concentrating voting control with the Schneider family and the trustees under the Schneider National, Inc. Voting Trust, and limiting your ability to influence corporate matters. Their interests may conflict with yours in the future.

Immediately following this offering, we will have two classes of authorized and outstanding common stock:

 

    83,029,500 shares of Class A common stock, which is entitled to ten votes per share; and

 

    90,508,890 shares of Class B common stock, which is entitled to one vote per share.

All holders of Class A common stock and all holders of Class B common stock vote together as a single group on all matters submitted to a vote or consent of our shareholders. See “Description of Capital Stock”. Upon the consummation of this offering, assuming that the underwriters do not exercise the over-allotment option, the Schneider family, including trusts established for the benefit of members of the Schneider family, will collectively beneficially own 100% of our outstanding Class A common stock and 46.9% of our outstanding Class B common stock, representing approximately 94.8% of the total voting power of all of our outstanding common stock and approximately 72.3% of our total outstanding common stock.

The Voting Trust holds the shares of Class A common stock. The trustees of the Voting Trust (the “Voting Trustees”) and certain members of the Schneider family have entered into the Amended and Restated 1995 Schneider National, Inc. Voting Trust Agreement and Voting Agreement (the “Voting Trust Agreement”). Under the Voting Trust Agreement, the Voting Trustees exercise all voting power with respect to shares of Class A common stock, except that on votes with respect to Major Transactions (as defined under our Amended and Restated Bylaws) the Voting Trustees must take direction from the holders of trust certificates, voting in the same proportion as the vote of the holders of trust certificates. As a result, the vote on any Major Transaction will not be controlled by the Voting Trustees, but instead will be controlled by certain trusts for the benefit of Schneider family members holding the trust certificates issued by the Voting Trust. See “Description of Capital Stock—Shareholder Approval of Major Transactions” and “Description of Capital Stock—Voting Trust Agreement”.

Under the Voting Trust Agreement, the Voting Trustees have agreed to vote the shares of Class A common stock in favor of our Chief Executive Officer and designated members of the Schneider family in any election of members of our Board of Directors in accordance with the nomination process agreement described below. This Voting Trust Agreement provides that the members of our corporate governance committee (other than Schneider family members) will serve as trustees of the Voting Trust. Schneider family members have entered into a nomination process agreement with us pursuant to which our corporate governance committee will recommend, and our Board of Directors will include in the slate of director nominees recommended to our shareholders, two specified Schneider family members to be nominated to serve on our Board of Directors on an annual, rotating basis. See “Description of Capital Stock—Voting Trust Agreement” and “Description of Capital Stock—Schneider Family Board Nomination Process Agreement.”

 

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Our Articles of Incorporation provide that each share of Class A common stock withdrawn from, or otherwise transferred out of, the Voting Trust will automatically be converted into a share of Class B common stock.

As a result of these arrangements, the Voting Trust’s voting control of us allows it to control the outcome of corporate actions that require or may be accomplished by shareholder approval, including the election and removal of directors and transactions resulting in a change in control of the company. For so long as the Voting Trust maintains control of us, our shareholders other than those members of the Schneider family will be unable to affect the outcome of proposed corporate actions supported by the Schneider family, including a change in control of the company.

The interests of the Schneider family may not be the same as ours or those of our other shareholders. For example, the Schneider family may have an interest in pursuing transactions that could enhance its investment even though such transactions might involve risks to the company and to you. The Schneider family may also have an interest in delaying, deterring or preventing a change in control or business combination that might otherwise be beneficial to the company and to you.

We will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, qualify for, and intend to rely on, exemptions from certain corporate governance requirements relating to our corporate governance committee. You will not have the same protections afforded to shareholders of other companies that are subject to such requirements.

Upon the completion of this offering, the Voting Trust will have more than 50% of the voting power for the election of directors. As a result, we will qualify as a “controlled company” under the corporate governance rules for NYSE-listed companies. As a controlled company, certain exemptions under the NYSE listing standards will exempt us from the obligation to comply with certain NYSE corporate governance requirements, including the requirement that we have a corporate governance committee that is composed entirely of independent directors.

We have elected to take advantage of this “controlled company” exemption, and the holders of our Class B common stock therefore may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance rules for NYSE-listed companies. Our status as a controlled company could therefore make our Class B common stock less attractive to some investors or otherwise harm our stock price.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, and our management will be required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult to run our business.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the SEC and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly although we are currently unable to estimate these costs with any degree of certainty. Our management will need to devote a substantial amount of time to ensure that we comply with all of these requirements. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class B common stock, fines, sanctions and other regulatory action and potentially civil litigation.

 

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Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business, reputation and stock price.

We are not currently required to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act, or Section 404, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our operating results. As a public company, we will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering.

When evaluating our internal controls over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude, on an ongoing basis, that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our Class B common stock.

There may not be an active, liquid trading market for our shares of Class B common stock, which may cause shares of our Class B common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of Class B common stock you purchase.

Prior to this offering, there has been no public market for shares of our Class B common stock. We cannot predict the extent to which investor interest in the company will lead to the development of a trading market on the NYSE or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any shares of our Class B common stock that you purchase. The initial public offering price of shares of our Class B common stock is, or will be, determined by negotiation between us and the underwriters and may not be indicative of prices that will prevail following the completion of this offering. The market price of shares of our Class B common stock may decline below the initial public offering price, and you may not be able to resell your shares of our Class B common stock at or above the initial public offering price, or at all.

We are not selling shares of our Class A common stock in this offering, and accordingly there will be no public market for shares of our Class A common stock.

We expect that our Class B common stock price will fluctuate significantly, and you may not be able to resell your shares at or above the initial public offering price.

The trading price of our Class B common stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including:

 

    market conditions in the broader stock market in general, or in our industry in particular;

 

    actual or anticipated fluctuations in our guidance, quarterly financial reports and operating results;

 

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    our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

 

    adverse market reaction to any additional indebtedness incurred or securities we may issue in the future;

 

    introduction of new products and services by us or our competitors;

 

    announcements by our competitors of acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments;

 

    issuance of new or changed securities analysts’ reports or recommendations;

 

    sales of large blocks of our stock;

 

    additions or departures of key personnel;

 

    changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business;

 

    adverse publicity about our industry or individual scandals;

 

    litigation and governmental investigations; and

 

    economic and political conditions or events.

These and other factors may cause the market price and demand for our Class B common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Class B common stock and may otherwise negatively affect the liquidity of our Class B common stock. In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

Future sales, or the perception of future sales, by us or our existing shareholders in the public market following this offering could cause the market price of our Class B common stock to decline.

If our existing shareholders sell substantial amounts of our Class B common stock in the public market following this offering, or transfer substantial amounts of our Class A common stock in a manner that would cause such Class A common stock to automatically convert into newly issued shares of Class B common stock, the market price of our Class B common stock could decrease significantly. The perception in the public market that our existing shareholders might sell shares of Class B common stock or transfer shares of Class A common stock could also depress our market price. Upon completion of this offering, we will have 83,029,500 shares of Class A common stock outstanding and 90,508,890 shares of Class B common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and excluding 83,029,500 shares of Class B common stock issuable upon the conversion of our Class A common stock that will be outstanding after this offering, 8,000,000 shares of Class B common stock reserved as of the closing date of this offering for future issuance under our 2017 Omnibus Incentive Plan, and 3,900,000 shares of Class B common stock reserved as of the closing date of this offering for future issuance under our Omnibus Long-Term Incentive Plan. Of the outstanding shares, all of the shares sold in this offering, plus any additional shares sold upon exercise of the underwriters’ over-allotment option, will be freely tradable, except that any shares purchased by “affiliates” (as that term is defined in Rule 144 under the Securities Act) may be sold only in compliance with the limitations described under “Shares Eligible for Future Sale.”

 

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Taking into consideration the effect of the lock-up agreements described below and the provisions of Rule 144 and Rule 701 under the Securities Act, the remaining shares of our common stock will be available for sale in the public market as follows:

 

    28,947,000 shares will be eligible for sale on the date of this prospectus;

 

    107,431,950 shares will be eligible for sale upon the expiration of the lock-up agreements described below; and

 

    37,159,440 other shares will be eligible for sale, including shares issued to employees that we previously granted as equity awards.

We, our directors and executive officers, and certain holders of our outstanding common stock will enter into lock-up agreements in connection with this offering. The lock-up agreements expire 180 days after the date of this prospectus, subject to extension upon the occurrence of specified events. Morgan Stanley & Co. LLC, UBS Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements.

In addition, upon the closing of this offering, we will have an aggregate of up to 83,029,500 shares of Class B common stock issuable upon the conversion of our Class A common stock that will be outstanding after this offering, 8,000,000 shares of Class B common stock reserved as of the closing date of this offering for future issuance under our 2017 Omnibus Incentive Plan, and 3,900,000 shares of Class B common stock reserved as of the closing date of this offering for future issuance under our Omnibus Long-Term Incentive Plan. We intend to file one or more registration statements on Form S-8 under the Securities Act to register all of the common stock subject to outstanding equity awards, as well as stock options and shares reserved for future issuance, under our 2017 Omnibus Incentive Plan, and shares currently held by certain of our employees that were previously granted as equity awards. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market, subject in the case of shares held by our affiliates to volume limits under Rule 144 and any applicable lock-up period.

After requisite holding periods have elapsed and, in the case of restricted stock, the shares have vested, additional shares will be eligible for sale in the public market. The market price of shares of our Class B common stock may drop significantly when the restrictions on resale by our existing shareholders lapse. A decline in the price of shares of our Class B common stock might impede our ability to raise capital through the issuance of additional shares of our Class B common stock or other equity or equity-linked securities.

Some provisions of Wisconsin law and our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws that will be in effect at the closing of this offering could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our Class B common stock.

Upon the closing of this offering, our status as a Wisconsin corporation and the anti-takeover provisions of the Wisconsin Business Corporation Law (WBCL) may discourage, delay or prevent a change in control even if a change in control would be beneficial to our shareholders by prohibiting us from engaging in a business combination with an interested shareholder for a period of three years after the person becomes an interested shareholder. We may engage in a business combination with an interested shareholder after the expiration of the three-year period with respect to that shareholder only if one or more of the following conditions is satisfied: (1) our Board of Directors approved the acquisition of the stock before the date on which the shareholder acquired the shares, (2) the business combination is approved by a majority of our outstanding voting stock not beneficially owned by the interested shareholder or (3) the consideration to be received by shareholders meets certain fair price requirements of the WBCL with respect to form and amount.

 

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In addition, our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws that will be in effect upon the closing of this offering will contain provisions that may make the acquisition of the company more difficult, including the following:

 

    a dual class common stock structure, which provides the Schneider National, Inc. Voting Trust with the ability to control the outcome of matters requiring shareholder approval, even if the Schneider National, Inc. Voting Trust beneficially owns significantly less than a majority of the shares of our outstanding Class A and Class B common stock;

 

    require that certain transactions be conditioned upon approval by 60 percent of the voting power of our capital stock, including any transaction which results in the Schneider family holding less than 40 percent of the voting power of our capital stock, a sale of substantially all of our assets and a dissolution;

 

    do not provide for cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;

 

    provide that special meetings of shareholders may be called only by the Board of Directors and the chief executive officer, and by our shareholders only if holders of at least ten percent of all votes entitled to be cast on the proposed issue submit a written demand in accordance with the WBCL and the other provisions of our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws;

 

    establish advance notice procedures for the nomination of candidates for election as directors or for proposing matters that can be acted upon at shareholder meetings; and

 

    authorize undesignated preferred stock, the terms of which may be established and shares of which may be issued by our Board of Directors without shareholder approval.

These provisions could have the effect of discouraging, delaying or preventing a transaction involving a change in control of the company. These provisions could also have the effect of discouraging proxy contests and make it more difficult for you and other shareholders to elect directors of your choosing and cause us to take other corporate actions that you desire.

Investors in this offering will experience immediate and substantial dilution.

The initial public offering price of our Class B common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding Class B common stock immediately after this offering. Based on an assumed initial public offering price of $19.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and our net tangible book value as of December 31, 2016, if you purchase our Class B common stock in this offering you will pay more for your shares than the amounts paid by our existing shareholders for their shares and you will suffer immediate dilution of approximately $11.53 per share in pro forma net tangible book value (after giving retroactive effect to the issuance of the pre-IPO split dividend). See “Dilution.” As a result of such dilution, investors purchasing Class B common stock in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation.

You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have 83,029,500 shares of Class B common stock issuable upon the conversion of our Class A common stock that will be outstanding after this offering, 8,000,000 shares of Class B common stock reserved as of the closing date of this offering for future issuance under our 2017 Omnibus Incentive Plan, and 3,900,000 shares of Class B common stock reserved as of the closing date of this offering for future issuance under our Omnibus Long-Term Incentive Plan. Our amended and restated articles of incorporation will authorize us to issue these shares of Class B common stock and options relating to Class B common stock for the

 

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consideration and on the terms and conditions established by our Board of Directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved shares for issuance under our 2017 Omnibus Incentive Plan. See “Compensation Discussion and Analysis—2017 Omnibus Incentive Plan.” Any Class B common stock that we issue, including under our 2017 Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase Class B common stock in this offering.

We will have broad discretion in using the net proceeds of this offering, and we may not effectively expend the proceeds.

We intend to use the net proceeds of this offering for general corporate purposes, including potential acquisitions, repayment of indebtedness and capital expenditures. We will have significant flexibility and broad discretion in applying the net proceeds of this offering and we may not apply the net proceeds of this offering effectively. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering. See “Use of Proceeds.”

None of the proceeds from the sale of shares of our Class B common stock by the selling shareholders in this offering will be available to us to fund our operations or to pay dividends.

We will not receive any proceeds from the sale of shares of our Class B common stock by the selling shareholders in this offering. The selling shareholders will receive all proceeds from the sale of such Class B shares. Consequently, none of the proceeds from such sale by the selling shareholders will be available to us to fund our operations, capital expenditures, compensation plans or acquisition opportunities or to pay dividends. See “Use of Proceeds.”

We may change our dividend policy at any time.

Although following this offering we initially expect to pay dividends to holders of our Class A and Class B common stock, we have no obligation to pay any dividend, and our dividend policy may change at any time without notice. The declaration and amount of any future dividends is subject to the discretion of our Board of Directors in determining whether dividends are in the best interest of our shareholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. Future dividends may also be affected by factors that our Board of Directors deems relevant, including our potential future capital requirements for investments, legal risks, changes in federal and state income tax laws or corporate laws and contractual restrictions such as financial or operating covenants in our debt arrangements. As a result, we may not pay dividends at any rate or at all.

Our business and stock price may suffer as a result of our lack of public company operating experience.

We have been a privately-held company since we began operations in 1935. Our lack of public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy, either as a result of our inability to effectively manage our business in a public company environment or for any other reason, our prospects, financial condition and operating results may be harmed.

If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.

The trading market for our Class B common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our

 

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competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts ceases coverage of us or fail to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our Class B common stock price or trading volume to decline.

Our Amended and Restated Bylaws designate courts in the State of Wisconsin as the exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders, which could limit your ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our Amended and Restated Bylaws provide that, unless the company consents in writing to the selection of an alternative forum, one of the Circuit Court for Brown County, Wisconsin or the U.S. District Court for the Eastern District of Wisconsin—Green Bay Division will be the exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a breach of fiduciary duty, (c) any action asserting a claim against us arising pursuant to the WBCL, our Amended and Restated Articles of Incorporation or our Amended and Restated Bylaws and (d) any action asserting a claim against us that is governed by the internal affairs doctrine, in all cases subject to the applicable court having personal jurisdiction over the indispensable parties named as defendants. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented to this exclusive forum provision. This exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.

Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition. In addition, the enforceability of similar choice of forum provisions in other companies’ articles of incorporation and bylaws has been challenged in legal proceedings, and it is possible that a court could find this exclusive forum provision to be inapplicable or unenforceable.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operating” and “Business” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology.

These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, many of which are beyond our control. We believe that these factors include but are not limited to those described under “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

Any forward-looking statement made by us in this prospectus speaks only as of the date of this prospectus. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

MARKET AND INDUSTRY DATA

We use market data and industry forecasts and projections throughout this prospectus, and in particular in the section entitled “Business.” We have obtained the market data from certain publicly available sources of information, including publicly available independent industry publications and other third-party sources. American Trucking Associations, Inc. (ATA), Association of American Railroads (AAR), Intermodal Association of North America (IANA) and Transportation Economics were the primary independent sources of market data. Unless otherwise indicated, statements in this prospectus concerning our industry and the markets in which we operate, including our general expectations and competitive position, business opportunity and market size, growth and share, are based on data from our internal research and management estimates and, where indicated, information from independent industry organizations and other third-party sources (including industry publications, surveys and forecasts). Forecasts are based on industry surveys and the preparer’s expertise in the industry and there is no assurance that any of the forecasted amounts will be achieved. We believe the data that third parties have compiled is reliable, but we have not independently verified the accuracy of this information. Any forecasts are based on data (including third-party data), models and experience of various professionals and are based on various assumptions, all of which are subject to change without notice. Forecasts, assumptions, expectations, beliefs, estimates and projections involve risks and uncertainties and are subject to change based on various factors, including those described under the headings “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”

 

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TRADEMARKS, SERVICE MARKS AND TRADE NAMES

Solely for convenience, the trademarks, service marks, logos and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names. This prospectus contains additional trademarks, service marks and trade names of others, which, to our knowledge, are the property of their respective owners. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $281 million, or approximately $359 million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $19.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use approximately $100 million of the net proceeds from this offering to repay the senior note outstanding under our Note Purchase Agreement dated May 7, 2010. The senior note bears interest at a rate of 4.83% and matures on May 7, 2017. The proceeds from the senior note were used for general corporate purposes. In addition, we intend to use approximately $50 million of the net proceeds from this offering to repay amounts outstanding under our Accounts Receivable Facility. The Accounts Receivable Facility bears interest at a floating rate based on a spread of 85 basis points plus the 30-day LIBOR market index rate and matures on December 17, 2017. The proceeds from the Accounts Receivable Facility were used for general corporate purposes. The remaining net proceeds from this offering will be used for general corporate purposes, including capital expenditures, such as chassis purchases as part of our conversion from a rented chassis model to a company-owned chassis model (current intention is in an amount of approximately $110 million) as described on pages 6-7, 86 and 91 of this prospectus, and potential acquisitions.

We will not receive any proceeds from the sale of shares by the selling shareholders but we will be required to pay the underwriting discounts and commissions associated with such sales of shares. The selling shareholders will receive approximately $230 million of proceeds from this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price per share of $19.00 per share, based on the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds by approximately $15 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial offering price per share, which is the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by approximately $18 million.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2016:

 

    on an actual basis;

 

    on an as adjusted basis to give effect to the reclassification of redeemable Class A and B common stock from temporary equity to shareholders’ equity to give effect to the removal of certain repurchase rights currently applicable to all of our common stock, which will occur concurrently with the closing of this offering; and

 

    on an as further adjusted basis to give effect to the reclassification described above and the issuance and sale of 16,842,000 shares of Class B common stock by us in the offering at an assumed initial public offering price of $19.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, the application of the net proceeds of the offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, as set forth under “Use of Proceeds.”

This table should be read in conjunction with “Prospectus Summary—Summary Historical Consolidated Financial and Other Data,” “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

     As of December 31, 2016  
     Actual      As Adjusted(1)      As Further
Adjusted(1)(2)
 
     ($ in thousands)      ($ in thousands)      ($ in thousands)  

Cash and cash equivalents

   $ 130,787      $ 130,787      $ 262,260  
  

 

 

    

 

 

    

 

 

 

Total debt and obligations under capital leases(3)

   $ 698,285      $ 698,285      $ 548,296  

Temporary equity:

        

Redeemable common stock, Class A

     563,217                

Redeemable common stock, Class B

     497,175                

Accumulated earnings

     125,175                

Accumulated other comprehensive income

     883                

Shareholders’ equity:

        

Common stock, Class A

                    

Common stock, Class B

                    

Additional paid-in capital

            1,060,392        1,341,865  

Retained earnings

            125,175        125,164  

Accumulated other comprehensive income

            883        883  
  

 

 

    

 

 

    

 

 

 

Total shareholders’ equity

            1,186,450        1,467,912  
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 1,884,735      $ 1,884,735      $ 2,016,208  
  

 

 

    

 

 

    

 

 

 

 

(1)

The as adjusted and as further adjusted columns present our capitalization giving effect to the reclassification of amounts attributed to redeemable Class A and B common stock to shareholders’ equity, including common stock and additional paid-in capital. Contemporaneously with the completion of this offering, we will amend the Schneider National, Inc. Employee Stock Purchase Plan and certain agreements governing ownership of our common stock held by existing shareholders, including members of the Schneider family and their family trusts, in order to remove provisions that currently grant each of our shareholders the right to require us to repurchase our common stock held by such shareholder under certain circumstances. When these repurchase rights terminate upon completion of this offering, all of our

 

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  outstanding common stock will be treated as shareholders’ equity rather than temporary equity under GAAP and our common stock will no longer be treated as redeemable under GAAP.
(2) Each $1.00 increase (decrease) in the assumed initial public offering price of $19.00 per share would increase (decrease) additional paid-in capital, total shareholders’ investment and total capitalization by $15,873,585, assuming the number of shares offered by us remains the same as set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial public offering price of $19.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) additional paid-in capital, total shareholders’ investment and total capitalization by approximately $17,907,500 after deducting the estimated underwriting discount and commissions and estimated offering expenses payable by us.
(3) Amounts net of unamortized debt issuance costs.

 

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DIVIDEND POLICY

As a public company we anticipate paying a quarterly dividend to holders of our Class A and Class B common stock.

The declaration and payment of all future dividends to holders of our common stock will be at the discretion of our Board of Directors and will depend on many factors, including our financial condition, earnings, legal requirements and any debt agreements we are then party to and other factors our Board of Directors deems relevant. Our Amended and Restated Articles of Incorporation provide that holders of our Class A common stock and holders of our Class B common stock will be treated equally and ratably on a per share basis with respect to any such dividends, unless disparate treatment is approved in advance by the vote of the holders of a majority of the outstanding shares of our Class A common stock and Class B common stock, each voting as a separate group.

Prior to this offering, after giving retroactive effect to issuance of the pre-IPO split dividend, we paid annual dividends of $0.13 per share of redeemable Class A common stock and Class B common stock in fiscal year 2014, $0.16 per share of redeemable Class A common stock and Class B common stock in fiscal year 2015 and $0.20 per share of redeemable Class A common stock and Class B common stock in fiscal year 2016. On March 6, 2017, our Board of Directors declared a quarterly dividend of $0.05 per share (after giving retroactive effect to the issuance of the pre-IPO split dividend) of Class A common stock and Class B common stock payable on March 20, 2017, to holders of record as of March 10, 2017.

 

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DILUTION

If you invest in our Class B common stock in this offering, your ownership interest in us will be diluted immediately to the extent of the difference between the initial public offering price per share you will pay in this offering and the as adjusted net tangible book value per share of our Class B common stock immediately after this offering and the use of proceeds therefrom.

After giving retroactive effect to the issuance of the pre-IPO split dividend, our net tangible book value as of December 31, 2016, was $1,012,232,511 or $6.48 per share of our Class A and Class B common stock. Net tangible book value per share represents the amount of our total tangible assets, less the amount of our total liabilities, divided by the aggregate number of shares of Class A and Class B common stock outstanding.

After giving pro forma effect (1) to the sale by us and by the selling shareholders of the shares of Class B common stock in this offering, at an assumed initial public offering price of $19.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the receipt and application of the net proceeds, as set forth under “Use of Proceeds” and (2) the termination of our shareholders’ current rights to require us to repurchase our common stock held by our shareholders under certain circumstances, and retroactive effect to the issuance of the pre-IPO split dividend, our as adjusted net tangible book value as of December 31, 2016, would have been $1,293,705,914 or $7.47 per share of our Class B common stock. This amount represents an immediate increase in net tangible book value to existing shareholders of $0.99 per share and an immediate dilution to new investors purchasing shares in this offering of $11.53 per share (after giving retroactive effect to the issuance of the pre-IPO split dividend). Dilution per share represents the difference between the price per share to be paid by new investors for the shares of Class B common stock sold in this offering and the net tangible book value per share immediately after this offering. The following table illustrates this per share dilution assuming the underwriters do not exercise their option to purchase additional shares (giving retroactive effect to the issuance of the pre-IPO split dividend).

 

Assumed initial public offering price per share

      $ 19.00  

Net tangible book value per share as of December 31, 2016

   $ 6.48     

Increase in net tangible book value per share attributable to the offering

   $ 0.99     
  

 

 

    

As adjusted net tangible book value per share after the offering

      $ 7.47  
     

 

 

 

Dilution per share to new investors

      $ 11.53  
     

 

 

 

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, a $1.00 increase (decrease) in the assumed initial public offering price of $19.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) the net tangible book value per share after giving effect to this offering by $0.09 per share and would increase or decrease the dilution in net tangible book value per share to new investors in this offering by $0.91 per share (giving retroactive effect to the issuance of the pre-IPO split dividend). An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial public offering price of $19.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, would increase (decrease) additional paid-in capital and total shareholders’ equity by approximately $17,907,500 after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, would increase (decrease) the net tangible book value attributable to new investors by $0.06 per share and the dilution to new investors by $0.06 per share and increase (decrease) the adjusted net tangible book value (deficit) per share after giving effect to this offering, by $0.06 per share (giving retroactive effect to the issuance of the pre-IPO split dividend).

The following table sets forth, on an as adjusted basis as of December 31, 2016, the differences between the number of shares of Class B common stock purchased from us and the selling shareholders, the total

 

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consideration paid to us, or to be paid, and the average price per share paid, or to be paid, by existing shareholders and by the new investors. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing shareholders paid. The table below assumes an initial public offering price of $19.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and gives retroactive effect to the issuance of the pre-IPO split dividend.

 

     Shares Purchased      Total Consideration      Average
Price Per
Share
 
     Number      Percent      Amount      Percent     

Existing shareholders

     156,324,060        90.3%      $ 65,554,373        17.0%      $ 0.42  

New investors(1)

     16,842,000        9.7           319,998,000        83.0         $ 19.00  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     173,166,060        100%      $ 385,552,373        100%        2.23  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(1) Does not reflect any shares that may be purchased by new investors from us pursuant to the underwriters’ option to purchase additional shares.

A $1.00 increase or decrease in the assumed initial public offering price of $19.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase or decrease total consideration paid to us by new investors and total consideration paid to us by all shareholders by approximately $16,842,000. An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and average price per share paid by all shareholders by $19,000,000, $19,000,000 and $0.10 per share, respectively, in each case giving retroactive effect to the issuance of the pre-IPO split dividend.

To the extent that we grant options to our employees in the future and those options are exercised or other issuances of Class B common stock are made, there will be further dilution to new investors.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present our selected historical consolidated financial and other data as of and for the periods indicated. We have derived the selected consolidated balance sheet data for the years ended December 31, 2016 and December 31, 2015 and the consolidated statement of operations data for the years ended December 31, 2016, December 31, 2015 and December 31, 2014 from the audited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2014 and the selected consolidated statement of operations data for the year ended December 31, 2013 have been derived from our audited consolidated financial statements that are not included in this prospectus. The selected consolidated statement of operations data for the year ended December 31, 2012 and the consolidated balance sheet data as of December 31, 2012 have been derived from our unaudited consolidated financial statements that are not included in this prospectus.

You should read the following selected consolidated financial and other data together with the sections of this prospectus titled “Prospectus Summary—Summary Historical Consolidated Financial and Other Data,” “Use of Proceeds,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

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($ in thousands, except for share and per share amounts)

  Year Ended December 31,  
    2016     2015     2014     2013     2012  

Consolidated Statements of Income Data

         

Operating revenues

  $ 4,045,736     $ 3,959,372     $ 3,940,576     $ 3,624,366     $ 3,489,434  

Operating expenses:

         

Purchased transportation

    1,465,994       1,430,164       1,384,979       1,198,090       1,106,389  

Salaries, wages, and benefits

    1,129,304       1,076,512       1,037,781       974,570       983,026  

Fuel and fuel taxes

    252,918       290,454       455,751       504,457       539,018  

Depreciation and amortization

    266,031       236,330       230,008       212,557       220,710  

Operating supplies and expenses

    449,871       452,452       435,753       397,465       368,966  

Insurance and related expenses

    89,076       82,007       62,846       71,577       53,690  

Other general expenses

    102,137       125,176       94,107       94,401       87,946  

Goodwill impairment charge

          6,037                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    3,755,331       3,699,132       3,701,225       3,453,117       3,359,745  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    290,405       260,240       239,351       171,249       129,689  

Non-operating expenses:

         

Interest expense—net

    21,376       18,730       11,732       13,860       13,700  

Other—net

    3,431       2,786       1,756       851       1,401  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expenses

    24,807       21,516       13,488       14,711       15,101  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    265,598     $ 238,724     $ 225,863     $ 156,538     $ 114,588  

Provision for income taxes

    108,747       97,792       92,295       61,064       45,898  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    156,851     $ 140,932     $ 133,568     $ 95,474     $ 68,690  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data(1)

         

Net income per share attributable to common shareholders

         

Basic

  $ 1.00     $ 0.91     $ 0.86     $ 0.62     $ 0.44  

Diluted

  $ 1.00     $ 0.91     $ 0.86     $ 0.61     $ 0.44  

Weighted average number of shares used in per share amounts

         

Basic

    156,566,057       155,289,954       154,983,767       154,785,163       156,126,064  

Diluted

    156,836,987       155,566,434       155,330,117       155,326,663       156,587,044  

Consolidated Balance Sheet Data

         

Cash and cash equivalents

  $ 130,787     $ 160,676     $ 149,885     $ 170,832     $ 170,222  

Property and equipment (net)

    1,758,055       1,503,957       1,276,202       1,059,557       1,008,121  

Total assets

    3,054,641       2,621,937       2,320,211       2,010,236       1,893,927  

Long-term debt and obligations under capital leases

    439,627       539,606       509,223       294,902       336,320  

Temporary equity—Redeemable common stock, Class A(2)

    563,217       504,543       443,793       401,448       371,419  

Temporary equity—Redeemable common stock, Class B(2)

    497,175       441,018       383,109       347,050       323,107  

Accumulated earnings

    125,175       109,550       106,969       73,050       49,728  

Accumulated other comprehensive income

    883       412       810       758       1,663  

Total Dividends

    31,265       25,158       20,697       16,001       12,794  

Dividends Per Share(1)

    0.20       0.16       0.13       0.10       0.08  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Share data gives retroactive effect to the issuance of the pre-IPO split dividend.
(2) Pursuant to the Schneider National, Inc. Employee Stock Purchase Plan and certain agreements governing ownership of our common stock held by existing shareholders, including members of the Schneider family and their family trusts, each of our shareholders may require us to repurchase our common stock held by such shareholder under certain circumstances. As a result of these repurchase rights, we determined that our common stock is presently redeemable in accordance with GAAP, and therefore our common stock is treated as temporary equity in our historical financial statements. All such repurchase rights will be terminated contemporaneously with, and contingent upon, the completion of this offering via amendments to these documents. As a result, all of our outstanding redeemable common stock will be classified within shareholders’ equity, including common stock and additional paid-in capital. See “Capitalization.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with “Prospectus Summary—Summary Historical Consolidated Financial and Other Data,” “Selected Historical Consolidated Financial and Other Data” and consolidated financial statements and related notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this prospectus. Actual results could differ materially from the results discussed in any forward-looking statements. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Overview

We are a leading transportation and logistics services company providing a broad portfolio of premier truckload, intermodal and logistics solutions and operating one of the largest for-hire trucking fleets in North America. We believe we have developed a differentiated business model that is difficult to replicate due to our scale, breadth of complementary service offerings and proprietary technology platform. Our highly flexible and balanced business combines asset-based truckload services with asset-light intermodal and non-asset logistics offerings, enabling us to serve our customers’ diverse transportation needs. Since our founding in 1935, we believe we have become an iconic and trusted brand within the transportation industry by adhering to a culture of safety “first and always” and upholding our responsibility to our associates, our customers and the communities that we serve.

We are the second largest truckload company in North America by revenue, one of the largest intermodal transportation providers in North America by revenue and an industry leader in specialty equipment services and e-commerce fulfillment. We categorize our operations into the following reportable segments:

 

    Truckload – which consists of freight transported and delivered with standard and specialty equipment by our company-employed drivers in company trucks and by owner-operators. Our truckload services include standard long-haul and regional shipping services primarily utilizing dry van equipment and bulk, temperature controlled, final mile “white glove” delivery and customized solutions for high-value and time-sensitive loads. These services are executed through either for-hire or dedicated contracts.

 

    Intermodal – which consists of door-to-door, container on flat car service by a combination of rail and over-the-road transportation, in association with our rail carrier partners. Our intermodal service offers vast coverage throughout North America, including cross-border freight through company containers and trucks.

 

    Logistics – which consists of non-asset freight brokerage services, supply chain services (including 3PL) and import/export services. Our logistics business typically provides value-added services using third-party capacity, augmented by our assets, to manage and move our customers’ freight.

In addition, we engage in equipment leasing to third parties through our wholly-owned subsidiary Schneider Finance, Inc. (SFI), which is an equipment leasing company primarily engaged in leasing trucks to owner-operators with whom we contract. We also provide insurance for both the company and owner-operators through our wholly owned insurance subsidiary and conduct limited China-based trucking operations consisting primarily of truck brokerage services.

Our portfolio consists of approximately 10,500 company and 2,850 owner-operator trucks, 37,900 trailers and 18,100 intermodal containers across North America and approximately 19,300 enterprise associates. We serve a diverse customer base across multiple industries represented by approximately 16,000 customers, including nearly 200 Fortune 500 companies. Each day, we transit over 8.9 million miles, equivalent to circling the globe approximately 360 times. Our logistics business manages nearly 23,000 qualified carrier relationships

 

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and, in 2016, managed approximately $2 billion of third-party freight. In addition, we have established a network of facilities across North America in order to maximize the geographic reach of our company trucks and owner-operators and provide maintenance services and personal amenities for our drivers. Our portfolio diversity, network density throughout North America and large fleet allow us to provide an exceptional level of service to our customers and consistently excel as a reliable partner, especially at times of peak demand.

Our success depends on our ability to balance our transportation network and efficiently and effectively manage our resources in the delivery of truckload, intermodal and logistics services to our customers. Resource requirements vary with customer demand, which may be subject to seasonal or general economic conditions. Our ability to properly select freight and adapt to changes in customer transportation requirements is important to efficiently deploy resources and make capital investments in trucks, trailers, containers and chassis (with respect to our truckload and intermodal segments) or obtain qualified third-party capacity at a reasonable price (with respect to our logistics segment). Although our business volume is not highly concentrated, our customers’ financial failures or loss of customer business may also affect us.

Factors Affecting Our Company and Results of Operations

Market Demand

Our results of operations are affected by industry-wide economic factors, general economic conditions, seasonal trucking industry freight patterns and industry capacity. The industry in which we operate is impacted by key drivers and trends including: the industrial and consumer economic environment of the United States, shipper demand for transportation services, truckload and intermodal capacity, market prices and the strength of the secondary equipment sales market. Our results of operations depend on our ability to efficiently manage our resources in providing solutions to our customers across all of our businesses in light of these factors. These drivers and trends impact our decisions in areas such as allocating capital across our reportable segments, driver wages, customer acquisition and retention, freight rates and investments in technology and fleet age.

Fuel

Shortages of fuel, increases in fuel prices and rationing of petroleum products can have a material adverse effect on our operations and profitability. Our customer fuel surcharge reimbursement programs generally enable us to recover from our customers a majority, but not all, of higher fuel prices compared to normalized average fuel prices. Rapid fluctuations in fuel cost can impact the effectiveness of those fuel surcharge reimbursement programs. In addition, we also pay fuel surcharges to our railroad partners in our intermodal segment. We attempt to offset these expenses by passing the fuel costs through to our customers. At times, the amount of fuel surcharge revenue we receive from our customers is less than the amount of fuel surcharges we pay to railroads in our intermodal segment, which can adversely affect our profitability.

Driver Capacity and Wage Cost

We recognize that our professional driver workforce is one of our most valuable assets. At times, there are driver shortages in the trucking industry. Changes in the demographic composition of the workforce, alternative employment opportunities that become available in the economy, and individual drivers’ desire to be home more frequently can affect availability of drivers, including by increasing the wages our drivers require. Driver shortages impact both our ability to serve customers and driver wages paid to attract and retain drivers and can have a material adverse effect on our operations and profitability.

 

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Regulations

We are a motor carrier regulated by the DOT in the United States and similar governmental transportation agencies in the foreign countries in which we operate. The DOT generally governs matters such as safety requirements, registration to engage in motor carrier operations, and Hours of Service (HOS). New regulations and changes in regulations, such as the upcoming requirement to use electronic logging devices, could have a significant impact on the industry and company by increasing costs and reducing driver availability.

We have, and have always maintained, a satisfactory DOT safety rating, which is the highest available rating, and continually take efforts to maintain our satisfactory rating. A conditional or unsatisfactory DOT safety rating could adversely affect us because some of our customer contracts require a satisfactory rating. Equipment weight and dimensions are also subject to federal, state and international regulations with which we are required to comply.

We do not anticipate that the regulatory changes currently scheduled or being reviewed will have a material adverse impact on the Company.

Classification and Wage Litigation

The industry, including the company, has been subject to class action lawsuits challenging its compliance with aspects of the Fair Labor Standard Act (FLSA). Findings against us have the potential to both result in significant penalties and require inefficient, difficult to implement processes. As these judicial and legislative interpretations have taken effect, we have made the necessary adjustments to adequately comply with such interpretations.

Seasonality

In the transportation industry, results of operations generally show a seasonal pattern. As our customers ramp up for the holiday season at year-end, the late third and fourth quarters historically have been our strongest volume quarters. As our customers reduce shipments after the winter holiday season, the first quarter historically has been a lower volume quarter. Additionally, our operating expenses tend to be higher in the winter months primarily due to colder weather, which causes higher fuel consumption from increased idle time.

Key Performance Indicators

In addition to traditional financial metrics and our segment-level financial information, we track the key performance indicators described below to evaluate our business performance relative to our competitors and facilitate long-term high-level strategic planning.

Enterprise Level

We rely upon adjusted income from operations at the enterprise level to evaluate our business performance and facilitate long-term strategic planning. Operating ratio and adjusted operating ratio are used by us as indicators of our operating efficiency and profitability.

Adjusted income from operations and adjusted operating ratio are non-GAAP financial measures. Please see “—Results of Operations” below for a reconciliation of income from operations, the most comparable measure under GAAP, to adjusted income from operations, and operating ratio, the most comparable measure under GAAP, to adjusted operating ratio, respectively.

 

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Truckload Segment

Trucks

Trucks includes both company and owner-operator trucks in our active fleet that are available to be dispatched to haul freight at any point in time. This includes trucks that are able to be dispatched but have not been assigned a driver or are otherwise unstaffed.

Company trucks, a subset of trucks, includes trucks owned by the company and trucks acquired under capital and/or operating leases, and excludes units held for sale. Owner-operator trucks includes trucks owned and operated by third parties responsible for their own maintenance, licensing and other costs, but operated under our operating authority. Number of trucks is a key indicator of our capacity to haul freight in our truckload segment. This measure changes based on our ability to increase or decrease our fleet size to respond to changes in demand, as well as our ability to match drivers with trucks.

Average trucks is calculated based on beginning and ending month counts and represents the average number of trucks available to haul freight over a specific time frame.

Revenue Per Truck Per Week

Revenue per truck per week is a key productivity metric for our truckload segment and is calculated by dividing revenue (excluding fuel surcharge), which is how revenue is reported for segment purposes (as described below), by average trucks divided by weeks based on weighted workdays. Average trucks is calculated based on beginning and ending month counts. Because fuel surcharge revenues fluctuate in response to changes in fuel costs, we identify them separately and exclude them from the statistical calculations to provide a meaningful comparison between periods.

We strive to increase our revenue per truck per week by increasing freight rates and ancillary services billed to our customers, by hauling more loads and by moving more revenue producing miles with our existing equipment. Effectively moving freight within our network, keeping trucks maintained, recruiting and retaining drivers, and contracting owner-operators each impacts the increase of loads and miles and therefore revenue per truck per week.

We also assess average trucks and revenue per truck per week within the truckload segment to determine and compare how the type of contractual relationship with our customers, either for-hire or dedicated, drives our performance in a given period. The matrix explained in the bullet points below illustrates the way we monitor our truckload segment, based on the type of service offering and type of contractual relationship. We use this matrix to compare our business to our competitors and within our industry.

 

    For-hire (Standard)—Transportation services of one-way shipments utilizing standard dry van trailing equipment.

 

    For-hire (Specialty)—Transportation services of one-way shipments utilizing bulk, temperature controlled, flatbed, straight truck and other specialty equipment.

 

    Dedicated (Standard)—Transportation services with equipment devoted to customers under long-term contracts utilizing standard dry van trailing equipment.

 

    Dedicated (Specialty)—Transportation services with devoted equipment to customers under long-term contracts utilizing bulk, temperature controlled, flatbed, straight truck and other specialty equipment.

Trailers

Trailers are ‘standard’ 53-foot dry vans and specialty trailers, including flatbeds, temperature controlled trailers and bulk tankers, which we own or lease. Trailers is a key indicator of our capacity to haul freight in our truckload segment. This measure changes based mainly on our ability to increase our fleet size to respond to changes in demand.

 

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Operating Ratio—Truckload

Operating ratio is used by us as an indicator of operating efficiency and profitability of our truckload segment. It is calculated as segment operating expenses divided by segment revenue (excluding fuel surcharge).

The following table presents our key performance metrics for our truckload segment for the periods indicated, consistent with how revenues and expenses are reported internally for segment purposes.

 

Truckload

(Revenue in thousands)

   Year Ended December 31,  
     2016      2015      2014  

Dedicated standard

        

Revenue (excluding fuel surcharge)

   $ 300,939      $ 267,542      $ 216,294  

Average trucks(1)(3)

     1,758        1,532        1,284  

Revenue per truck per week(2)

   $ 3,348      $ 3,416      $ 3,307  

Dedicated specialty

        

Revenue (excluding fuel surcharge)

   $ 381,543      $ 358,352      $ 327,133  

Average trucks(1)(3)

     2,050        1,917        1,837  

Revenue per truck per week(2)

   $ 3,639      $ 3,655      $ 3,495  

For-hire standard

        

Revenue (excluding fuel surcharge)

   $ 1,168,833      $ 1,191,997      $ 1,138,528  

Average trucks(1)(3)

     6,641        6,652        6,356  

Revenue per truck per week(2)

   $ 3,442      $ 3,504      $ 3,515  

For-hire specialty

        

Revenue (excluding fuel surcharge)

   $ 239,638      $ 159,079      $ 179,912  

Average trucks(1)(3)

     1,274        880        909  

Revenue per truck per week(2)

   $ 3,679      $ 3,534      $ 3,885  

Total Truckload

        

Revenue (excluding fuel surcharge)

   $ 2,090,953      $ 1,976,970      $ 1,861,867  

Average trucks(1)(3)

     11,722        10,982        10,385  

Revenue per truck per week(2)

   $ 3,488      $ 3,520      $ 3,518  

Average company trucks(1)

     9,026        8,536        8,336  

Average owner-operator trucks(1)

     2,696        2,446        2,048  

Trailers

     37,575        33,508        32,055  

Operating ratio

     89.4%        89.0%        89.2%  

 

(1) Calculated based on beginning and ending month counts and represents the average number of trucks available to haul freight over the specified time frame.
(2) Calculated excluding fuel surcharge, consistent with how revenue is reported internally for segment purposes, using weighted workdays.
(3) Includes company trucks and owner-operator trucks.

Intermodal Segment

Orders

Orders are requests from our intermodal customers for services for which the customer agrees to pay. Generally, an intermodal order represents a customer request for a full container of freight to be moved via intermodal from one shipping location to one destination. Because an order in an intermodal business generally represents one full container of freight to be transported by truck and by railroad, evaluating overall orders provides a consistent indicator of the volume and size of our intermodal business in a fiscal period. We review orders in intermodal but not truckload because in truckload there are significant differences in order size and volume within various truckload services such as final mile and other specialty services. For example, one

 

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truckload order may take up the entire capacity of a truck (known as a “full truckload” order) whereas another truckload order may be for a single end table or other item of furniture, leaving excess capacity in the truck. Given these differences, an order lacks consistency and reliability as a measurement tool for our truckload and logistics segments.

Containers

A container means a cargo container used in the domestic intermodal market with dimensions approximately the same as a 53-foot dry van that can be lifted from a detachable chassis and placed on a railcar (as opposed to international intermodal containers, which are 20-foot or 40-foot International Standards Organization (ISO) containers). Domestic intermodal containers are often double stacked on rail cars to minimize transportation cost. Containers are a key indicator of our ability to haul freight in our intermodal segment. This measure changes mainly based on our ability to increase our fleet size to respond to changes in demand.

Trucks

Trucks includes both company and owner-operator trucks in our active fleet that are available to be dispatched to haul freight at any point in time. This includes trucks that are able to be dispatched but have not been assigned a driver or are otherwise unstaffed.

Company trucks, a subset of trucks, includes trucks owned by the company and trucks acquired under capital and/or operating leases, and excludes units held for sale. Owner-operator trucks includes trucks owned and operated by third parties responsible for their own maintenance, licensing and other costs, but operated under our operating authority. Number of trucks is a key indicator of our capacity to haul freight in our intermodal segment. This measure changes based on our ability to increase or decrease our fleet size to respond to changes in demand, as well as our ability to match drivers with trucks.

Average trucks is calculated based on beginning and ending month counts and represents the average number of trucks available to haul freight over a specified time frame.

Revenue Per Order

Revenue per order is a key price metric for our intermodal segment and is calculated by dividing revenue (excluding fuel surcharge), consistent with how revenue is reported internally for segment purposes, by orders.

We strive to increase our revenue per order by improving rates with our customers. Orders and the rates received for our services affect revenue per order.

Operating Ratio—Intermodal

Operating ratio is used by us as an indicator of operating efficiency and profitability of our intermodal segment. It is calculated as segment operating expenses divided by segment revenue (excluding fuel surcharge, consistent with how revenue is reported internally for segment purposes).

 

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The following table presents our key performance indicators for our intermodal segment for the periods indicated.

 

Intermodal

   Year Ended December 31,  
     2016      2015      2014  

Orders (in thousands)

     381.4        386.9        376.9  

Containers

     17,653        17,397        17,280  

Trucks(1)

     1,244        1,335        1,313  

Revenue per order(2)

   $ 1,986      $ 2,040      $ 1,918  

Operating ratio

     93.9%        92.6%        94.3%  

 

(1) Includes company and owner-operator trucks.
(2) Calculated excluding fuel surcharge, consistent with how revenue is calculated internally for segment purposes.

Logistics Segment

Operating Ratio—Logistics

Operating ratio is used by us as an indicator of operating efficiency and profitability of our logistics segment. It is calculated as segment operating expenses divided by segment revenue (excluding fuel surcharge, consistent with how revenue is reported internally for segment purposes).

The following table presents our key performance indicator for our logistics segment for the periods indicated.

 

Logistics

   Year Ended December 31,  
     2016      2015      2014  

Operating ratio

     95.8%        96.0%        96.9%  

Components of Revenue and Expenses

Operating Revenue

Operating revenue represents all revenue, including fuel surcharge revenue, reduced by inter-segment eliminations.

We primarily generate operating revenue by transporting freight for our customers. We are typically paid a predetermined rate per mile for our services. We enhance our revenue by charging for ancillary services including stop-off pay, loading and unloading activities, truck, trailer and container detention and other services. The main factors that affect our revenue are our revenue per truck per week, our total number of trucks and the number of miles traveled by our trucks. In the case of our intermodal segment, we receive a rate per order. In our logistics segment, we generate brokerage revenue generally based on a rate per order, while supply chain services (including 3PL) and import/export services revenue is generally based on a rate per transaction or rate per service provided.

We also generate other revenue streams, mainly premium revenue generated by our captive insurance company, INS, and truck lease revenue streams through leases from our leasing company, SFI.

Fuel surcharge revenue is designed to compensate us for fuel costs above a certain cost per gallon base. Generally, we receive fuel surcharge revenue on the miles for which we are compensated by customers.

 

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However, we continue to have exposure, as a result of shipper and rail contracts, to changing fuel prices to the extent the fuel surcharge paid by the customer is insufficient to cover the cost of our fuel. Generally, fuel surcharge revenue is determined based on the average price of fuel in the United States as determined by the Department of Energy (DOE). The main factors that affect fuel surcharge revenue are the price of diesel fuel and the number of miles driven.

Management’s goal with respect to fuel surcharge revenue is to reduce fluctuations in financial results caused by the cost of fuel. Some customers choose to incorporate the additional charge by splitting the impact between the basic rate per mile and the fuel surcharge rate. Fuel surcharge is calculated on a lag, meaning, the rate that we charge customers is based on a previous week’s DOE index.

Adjusted enterprise revenue (excluding fuel surcharge) is derived by excluding fuel surcharge revenue from operating revenue. Management recognizes that fuel surcharge revenue can and does fluctuate as fuel costs fluctuate, which is out of the control of management and can distort comparisons and analytics.

Expenses

The key expenses in our business vary with miles traveled and include fuel, driver-related expenses (such as wages and benefits) and purchased transportation expenses (services purchased from owner-operators, other transportation providers, such as the railroads, drayage providers and other trucking companies). Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on fleet age, efficiency, safety history and other factors. Our main fixed costs are depreciation of long-term assets, such as trucks, trailers, containers, chassis, software, facilities and the compensation of non-driver personnel.

Purchased Transportation

Purchased transportation consists of the payments we make to railroads (including fuel surcharges paid to our railroad partners), owner-operators, and third-party carriers that haul loads on our behalf. Fluctuations in purchased transportation are the result of the rates paid for these services and the mix of customer orders moved by these third parties (compared to company equipment). Rates fluctuate due to industry supply and demand.

Salaries, Wages, and Benefits

Salaries, wages, and benefits consist primarily of compensation and related taxes and benefits (including worker’s compensation). Salaries, wages, and benefits are primarily affected by the total number of miles driven by company drivers, the rate per mile we pay our company drivers, employee benefits including but not limited to health care costs, and, to a lesser extent, by the number of, and compensation and benefits paid to, non-driver associates.

Fuel and Fuel Taxes

Fuel expense consists primarily of diesel fuel expense and fuel taxes for our company trucks. The primary factors affecting our fuel expense are the cost of diesel fuel, the miles per gallon we realize with our equipment and the number of miles driven by company drivers. We believe the most effective protection against fuel cost increases is to maintain a fuel-efficient fleet (by incorporating fuel efficiency measures, such as slower truck speeds and engine idle limitations) and effective fuel surcharge programs.

Depreciation and Amortization

Depreciation and amortization expense consists primarily of depreciation of company trucks, trailers, containers, chassis, facilities and office equipment, and also includes the amortization of software and other

 

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intangible assets. The primary factors affecting these expense items include the size and age of our truck, trailer, container and chassis fleet, the cost of new equipment and the expected value of the assets upon disposal.

Operating Supplies and Expenses

Operating supplies and expenses consist primarily of ordinary vehicle repairs and maintenance, driver tolls, third-party lumper and related services, tank-washing costs, costs associated with preparing trucks and trailers for sale or trade-in, costs of taxes and licenses associated with our fleet of equipment, driver expenses, facility and office equipment rents, utilities and communications expenses. Communications expenses include driver in-cab mobile communications devices.

It also includes gain or loss on the sale of property, plant and equipment, operating leases for trucks, trailers, containers, chassis, facilities and computer equipment, and the cost of goods sold by our sales-type equipment leasing business. The age and size of our company-fleet of trucks and trailers, the number of miles driven in a period, the number of owner-operators leasing equipment from us, the number of units sold and proceeds in the used equipment market are the primary factors affecting operating supplies and expenses.

Insurance and Related Expenses

Insurance and related expenses consist of insurance premiums and the accruals we make for estimated payments and expenses for claims for bodily injury, property damage, cargo damage and other casualty events. The primary factors affecting our insurance and related expense are the frequency and severity of accidents, seasonality (we typically experience higher accident frequency in winter months), developments in large, prior-year claims, trends in the development factors used in our actuarial accruals, and our self-insurance retention levels.

Other General Expenses

Other general expenses primarily represent administrative costs related to our organization. These costs include general office expenses, professional services, associate travel and entertainment, driver onboarding costs and other related expenses.

Goodwill Impairment Charge

Goodwill impairment charge is recorded when the carrying value of goodwill exceeds its fair value in connection with a goodwill impairment test.

Interest Expense—Net

Interest expense—net represents interest associated with our borrowings and leases and amortization of related issuance costs and fees.

Other—Net

Other—net represents all other non-operating expenses besides interest expense – net that are outside of our main operations.

Provision for Income Taxes

Provision for income taxes represents the estimated amount of income taxes that we expect to pay for the current year and deferred taxes which will affect our future tax obligations.

 

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Results of Operations

The following table sets forth, for the periods indicated, our results of operations:

 

($ in thousands)    Year ended December 31,  
     2016      2015      2014  

Operating revenue

   $ 4,045,736      $ 3,959,372      $ 3,940,576  

Operating expenses:

        

Purchased transportation

     1,465,994        1,430,164        1,384,979  

Salaries, wages, and benefits

     1,129,304        1,076,512        1,037,781  

Fuel and fuel taxes

     252,918        290,454        455,751  

Depreciation and amortization

     266,031        236,330        230,008  

Operating supplies and expenses

     449,871        452,452        435,753  

Insurance and related expenses

     89,076        82,007        62,846  

Other general expenses

     102,137        125,176        94,107  

Goodwill impairment charge

            6,037         
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     3,755,331        3,699,132        3,701,225  
  

 

 

    

 

 

    

 

 

 

Income from operations

   $ 290,405      $ 260,240      $ 239,351  

Non-operating expenses

        

Interest expense—net

     21,376        18,730        11,732  

Other—net

     3,431        2,786        1,756  
  

 

 

    

 

 

    

 

 

 

Total non-operating expenses

     24,807        21,516        13,488  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     265,595        238,724        225,863  

Provision for income taxes

     108,747        97,792        92,295  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 156,851      $ 140,932      $ 133,568  
  

 

 

    

 

 

    

 

 

 

Adjusted enterprise revenue (excluding fuel surcharge)(1)

   $ 3,751,696      $ 3,588,220      $ 3,333,718  

Adjusted income from operations(2)

   $ 293,099      $ 293,008      $ 244,276  

 

(1) Adjusted enterprise revenue (excluding fuel surcharge) is a non-GAAP financial measure, and represents operating revenue, minus fuel surcharge revenue. This non-GAAP financial measure should not be considered an alternative to, or superior to, the GAAP financial measure operating revenue. However, our management believes that the non-GAAP measure adjusted enterprise revenue (excluding fuel surcharge) provides a useful measure of business results because it eliminates the distortion caused by fluctuating fuel costs. Volume, price and cost changes directly related to how we operate our business and industry demand are more readily apparent utilizing adjusted enterprise revenue (excluding fuel surcharge), since it isolates these factors from the exogenous factor of fuel prices and the programs we have in place to manage fuel price fluctuations. Although fuel-related costs and its impact on the industry are important to our results of operations, they are often independent of other factors affecting our industry that are more directly germane to the transportation industry specifically. Please see the table below for a reconciliation of operating revenue, the most closely comparable GAAP financial measure, to adjusted enterprise revenue (excluding fuel surcharge).

 

($ in thousands)    Year Ended December 31,  
     2016      2015      2014  

Operating revenue

   $ 4,045,736      $ 3,959,372      $ 3,940,576  

less: Fuel surcharge revenue

     294,040        371,152        606,858  
  

 

 

    

 

 

    

 

 

 

Adjusted enterprise revenue (excluding fuel surcharge)

   $ 3,751,696      $ 3,588,220      $ 3,333,718  

 

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(2) We define “adjusted income from operations” as income from operations, adjusted to exclude certain litigation costs, goodwill impairment, acquisition costs and preparation costs in connection with this offering and initiating the transition from privately held to public company status. We describe these adjustments reconciling income from operations to adjusted income from operations in the table below.

We believe that using adjusted income from operations is helpful in analyzing our performance because it removes the impact of items from our operating results that, in our opinion, do not reflect our core operating performance. Our management and our Board of Directors focus on adjusted income from operations as a key measure of our performance. We believe our presentation of adjusted income from operations is helpful to investors because it provides investors the same information that we use internally for purposes of assessing our core operating performance.

Adjusted income from operations is a non-GAAP financial measure and should not be considered as an alternative to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and it should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In evaluating adjusted income from operations, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted income from operations should not be construed to imply that our future results will be unaffected by any such adjustments. Our management compensates for these limitations by primarily relying on our GAAP results in addition to using adjusted income from operations supplementally.

The following is a reconciliation of income from operations, which is the most directly comparable GAAP measure, to adjusted income from operations:

 

($ in thousands)    Year Ended December 31,  
     2016      2015      2014  

Income from operations

   $ 290,405      $ 260,240      $ 239,351  

Litigation(a)

            26,731        4,925  

Goodwill impairment(b)

            6,037         

Acquisition and IPO costs(c)

     2,694                
  

 

 

    

 

 

    

 

 

 

Adjusted income from operations

   $ 293,099      $ 293,008      $ 244,276  

 

  (a)   Costs associated with certain lawsuits challenging compliance with aspects of the Fair Labor Standards Act (FLSA).

 

  (b)   As a result of our annual goodwill impairment test as of December 31, 2015, we took an impairment charge for our Asia reporting unit.

 

  (c)   Costs related to the acquisitions of Watkins & Shepard and Lodeso of $1,363 and one-time preparation costs in connection with this offering and initiating the transition from privately held to public company status of $1,331.

 

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The following table sets forth, for the periods indicated, items in our Consolidated Statements of Comprehensive Income as a percentage of operating revenue:

 

     Year Ended December 31,  
     2016      2015         2014      

Operating revenue

     100.0%        100.0     100.0

Purchased transportation

     36.2%        36.1     35.1

Salaries, wages, and benefits

     27.9%        27.2     26.3

Fuel and fuel taxes

     6.3%        7.3     11.6

Depreciation and amortization

     6.6%        6.0     5.8

Operating supplies and expenses

     11.1%        11.4     11.1

Insurance and related expenses

     2.2%        2.1     1.6

Other general expenses

     2.5%        3.2     2.4

Goodwill impairment charge

     0.0%        0.2     0.0

Total operating expenses

     92.8%        93.4     93.9

Operating ratio is calculated on both a GAAP basis (operating expenses as a percentage of operating revenue) and on a non-GAAP basis, (which we refer to as adjusted operating ratio, and calculated as operating expenses, less fuel surcharge and certain litigation costs, goodwill impairment, change in vacation policy and acquisition costs as a percentage of adjusted enterprise revenue (excluding fuel surcharge). Adjusted operating ratio should not be considered an alternative to, or superior to, the GAAP financial measure operating ratio. However, we believe adjusted operating ratio allows us to effectively compare periods while excluding the potentially volatile effect of changes in fuel prices and other certain adjustments. Adjusted operating ratio is not a substitute for the GAAP measurement operating ratio.

The following table sets forth, for the periods indicated, operating ratio (GAAP) and adjusted operating ratio (non-GAAP):

 

     For the year ended December 31,  
         2016              2015             2014      

Operating ratio

     92.8%        93.4     93.9

Adjustment

     (0.6)%        (1.6 )%      (1.2 )% 
  

 

 

    

 

 

   

 

 

 

Adjusted operating ratio

     92.2%        91.8     92.7

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net Income

Net income for fiscal year 2016 was $156.9 million, an increase of $15.9 million, or 11.3%, compared to fiscal year 2015, primarily due to operating revenue growth, favorable fuel cost and lower legal costs.

Revenue

Operating revenue for fiscal year 2016 was $4,045.7 million, an increase of $86.4 million, or 2.2%, compared to fiscal year 2015. This increase was primarily due to increased volume in our truckload and logistics segments and our acquisition of Watkins & Shepard and Lodeso as part of our truckload segment in June 2016, offset by volume and price declines in our intermodal segment. Due to lower fuel prices, fuel surcharge revenue decreased $77.1 million, or 20.8%, compared to fiscal year 2015. Adjusted enterprise revenue (excluding fuel surcharge), for fiscal year 2016 was $3,751.7 million, an increase of $163.5 million, or 4.6% compared to fiscal year 2015.

 

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Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenue) for fiscal year 2016 was 92.8%, compared to 93.4% for fiscal year 2015. Key expense items that impacted the overall operating ratio are described below.

 

    Purchased transportation for fiscal year 2016 increased by $35.8 million, or 2.5%, compared to fiscal year 2015. The increase in purchased transportation was primarily due to an 8.7% increase in the average number of owner-operators and a 15.5% growth in our logistics segment operating revenue which resulted in higher third-party carrier costs. Offsetting the increase in purchased transportation costs was lower utilization of third-party carriers in our truckload segment and lower volumes in our intermodal segment. Purchased transportation represented 36.2% of our operating revenue for fiscal year 2016 and 36.1% of our operating revenue for fiscal year 2015.

 

    Salaries, wages, and benefits for fiscal year 2016 increased by $52.8 million, or 4.9%, compared to fiscal year 2015. The increase in salaries, wages, and benefits was primarily due to headcount and driver increases, merit increases and other costs related to our June 2016 acquisition of Watkins & Shepard. Salaries, wages, and benefits represented 27.9% of our operating revenue for fiscal year 2016 and 27.2% of our operating revenue for fiscal year 2015.

 

    Fuel and fuel taxes for fiscal year 2016 decreased by $37.5 million, or 12.9%, compared to fiscal year 2015. Age-of-fleet reductions and aerodynamic truck improvements resulted in a 1.9% improvement in miles per gallon, and cost per gallon decreased by 13.9% compared to fiscal year 2015. Fuel and fuel taxes represented 6.3% of our operating revenue for fiscal year 2016 and 7.3% of our operating revenue for fiscal year 2015.

 

    Depreciation and amortization for fiscal year 2016 increased by $29.7 million, or 12.6%, compared to fiscal year 2015. The increase was primarily due to increases in our fleet size through purchases and the acquisition of Watkins & Shepard. Depreciation and amortization represented 6.6% of our operating revenue for fiscal year 2016 and 6.0% of our operating revenue for fiscal year 2015.

 

    Operating supplies and expenses for fiscal year 2016 decreased by $2.6 million, or 0.6%, compared to fiscal year 2015. The decrease in operating supplies and expenses was primarily due to lower cost of goods sold under sales-type financing leases and a reduction in the number of truck operating leases offset by $8.7 million lower gains on equipment sales and by increased expenses due to the acquisition of Watkins & Shepard. Operating supplies and expenses represented 11.1% of our operating revenue for fiscal year 2016 and 11.4% of our operating revenue for fiscal year 2015.

 

    Insurance and related expenses for fiscal year 2016 increased by $7.1 million, or 8.6%, compared to fiscal year 2015. The increase in insurance and related expenses was primarily due to our acquisition of Watkins & Shepard offset by lower accident severity. Insurance and related expenses represented 2.2% of our operating revenue for fiscal year 2016 and 2.1% of our operating revenue for fiscal year 2015.

 

    Other general expenses for fiscal year 2016 decreased by $23.0 million, or 18.4%, compared to fiscal year 2015, primarily due to a $24.0 million reduction in legal expenses. Other general expenses represented 2.5% of our operating revenue for fiscal year 2016 and 3.2% of our operating revenue for fiscal year 2015.

Income from Operations

Income from operations for fiscal year 2016 was $290.4 million, an increase of $30.2 million, or 11.6%, compared to fiscal year 2015. Adjusted income from operations for fiscal year 2016 was $293.1 million, an increase of $0.1 million compared to fiscal year 2015.

 

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Interest and Taxes

 

    Interest expense—net for fiscal year 2016 increased by $2.6 million compared to fiscal year 2015. The increase in interest expense—net was primarily due to the debt related to our acquisition of Watkins & Shepard and Lodeso and the issuance of senior notes on March 10, 2015.

 

    Our effective tax rate for fiscal year 2016 was 40.9%, compared to 41.0% for fiscal year 2015. The decrease in effective tax rate was primarily related to a decrease in the provision for state and foreign taxes.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net Income

Net income for fiscal year 2015 was $140.9 million, an increase of $7.4 million, or 5.5%, compared to 2014, primarily due to operating revenue growth, lower fuel and workers compensation expenses offset by increased insurance and legal expenses.

Revenue

Operating revenue for fiscal year 2015 was $3,959.4 million, an increase of $18.8 million, or 0.5%, compared to 2014 primarily due to price and volume increases. Volume increases were due to improved productivity across existing equipment and increased equipment levels. Due to lower fuel prices, fuel surcharge revenue decreased $235.7 million, or 38.8%, compared to fiscal year 2014. Adjusted enterprise revenue (excluding fuel surcharge), for fiscal year 2015 was $3,588.2 million, an increase of $254.5 million, or 7.6%, compared to 2014.

Expenses

Our operating ratio (operating expenses expressed as a percentage of operating revenue) for the fiscal year 2015 was 93.4%, compared to 93.9% for fiscal year 2014. Key expense items that impacted the overall operating ratio are described below.

 

    Purchased transportation for fiscal year 2015 increased by $45.2 million, or 3.3%, compared to fiscal year 2014. The increase in purchased transportation was primarily due to over a 20% increase in the average number of owner-operators and an 8.7% growth in our logistics segment operating revenue. Offsetting the increase in purchased transportation costs were lower third-party capacity rates across all segments due to market supply level relative to demand and declining fuel prices resulted in lower fuel surcharges being paid to owner-operators and third-party carriers. Purchased transportation represented 36.1% of our operating revenue for fiscal year 2015, and 35.1% of our operating revenue for fiscal year 2014.

 

    Salaries, wages, and benefits for fiscal year 2015 increased by $38.7 million, or 3.7%, compared to fiscal year 2014. The increase in salaries, wages, and benefits was primarily due to over a 3% increase in our average number of company drivers, driver pay increases and an increase in our non-driver associates; primarily to accommodate growth in our logistics segment and in our maintenance operations due to increased fleet size. Offsetting the increase was lower worker’s compensation expense. Salaries, wages, and benefits represented 27.2% of our operating revenue for fiscal year 2015 and 26.3% of our operating revenue for fiscal year 2014.

 

    Fuel and fuel taxes for fiscal year 2015 decreased by $165.3 million, or 36.3%, compared to fiscal year 2014. Moderate weather, which generally improves driving conditions and enables our trucks to travel with fewer delays and obstacles than inclement weather, and lower national fuel prices resulted in over a 3% improvement in miles per gallon and over a 35% reduction in cost per gallon. Fuel and fuel taxes expense represented 7.3% of our operating revenue for fiscal year 2015 and 11.6% of our operating revenue for fiscal year 2014.

 

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    Depreciation and amortization for fiscal year 2015 increased by $6.3 million, or 2.7%, compared to fiscal year 2014. The increase was primarily due to an increase in our fleet size. Depreciation and amortization represented 6.0% of our operating revenue for fiscal year 2015 and 5.8% of our operating revenue for fiscal year 2014.

 

    Operating supplies and expenses for fiscal year 2015 increased by $16.7 million, or 3.8% compared to fiscal year 2014. The increase in operating supplies and expenses was primarily due to an increase in cost of goods sold under sales-type financing leases offset by a decrease of our revenue equipment operating leases; primarily chassis. Operating supplies and expenses represented 11.4% of our operating revenue for fiscal year 2015 and 11.1% of our operating revenue for fiscal year 2014.

 

    Insurance and related expenses for fiscal year 2015 increased by $19.2 million, or 30.5%, compared to fiscal year 2014. The increase in insurance and related expenses was primarily due to accident frequency. Insurance and related expenses represented 2.1% of our operating revenue for fiscal year 2015 and 1.6% of our operating revenue for fiscal year 2014.

 

    Other general expenses for fiscal year 2015 increased by $31.1 million, or 33.0%, compared to fiscal year 2014, primarily due to legal expenses of $26.7 million relating to a driver meal/rest break and wage lawsuit in California and an increase in driver onboarding due to over a 24% increase in company driver and owner-operator hires. Other general expenses represented 3.2% of our operating revenue for fiscal year 2015 and 2.4% of our operating revenue for fiscal year 2014.

 

    As further described in note 2 to the audited financial statements, we incurred a goodwill impairment charge for fiscal year 2015 of $6.0 million for our Asia business (included in our other segment).

Income from Operations

Income from operations for fiscal year 2015 was $260.2 million, an increase of $20.9 million, or 8.7%, compared to fiscal year 2014. Adjusted income from operations for fiscal year 2015 was $293.0 million, an increase of $48.7 million, or 19.9% compared to fiscal year 2014.

Interest and Taxes

 

    Interest expense—net for fiscal year 2015 increased by $7.0 million compared to fiscal year 2014. The increase in interest expense—net was primarily due to interest associated with the issuance of senior notes on November 10, 2014 and March 10, 2015 in a total aggregate principal amount of $300.0 million.

 

    Our effective tax rate for fiscal year 2015 was 41.0% compared to 40.9% fiscal year 2014. The increase in effective tax rate was primarily related to an increase in the provision for state taxes.

Results of Operations—Reportable Segments

Truckload

Our truckload segment consists of freight transported and delivered with standard and specialty equipment by company-employed drivers in company trucks and owner-operators. In addition to both long-haul and regional shipping services, our truckload services include team-based shipping for time-sensitive loads and bulk, temperature controlled, final mile “white glove” delivery and customized solutions for high-value loads. These services are executed through either for-hire or dedicated contracts. Our recent acquisitions of Watkins & Shepard and Lodeso have allowed us to rapidly expand our customized home, commercial and retail delivery offerings with “white glove” service for brick and mortar and e-commerce customers. Generally, our customers pay for our services based on the number of miles and for other ancillary services we provide. Fluctuations in North American activity, as well as changes in inventory levels, changes in shipper packaging methods that reduce volumes, specific customer demand, the level of capacity in the truckload industry, driver availability and

 

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modal shifts between truck and rail intermodal shipping affect trucking revenue. As of the end of fiscal year 2016, our truckload segment had approximately 11,900 trucks (both company and owner-operator), 30,300 standard and 7,200 specialty trailers. Revenue (excluding fuel surcharge) for the truckload segment in fiscal year 2016, consistent with how revenues are reported internally for segment purposes, was $2,091.0 million.

Intermodal

Our intermodal segment consists of door-to-door, container on flat car service by a combination of rail and over-the-road transportation, in conjunction with our rail carrier partners. Our intermodal service offers vast coverage within the United States and cross-border throughout North America. We generate intermodal segment revenue by hauling freight for our customers using our trucks and containers over-the-road and over-the-rail. Generally, our customers pay us per order, based on the number of miles and for other ancillary services we provide. The main factors that affect intermodal rail revenue are available containers, rail capacity and our revenue per order. Fluctuations in North American economic activity, as well as changes in inventory levels, changes in shipper packaging methods that reduce volumes, specific customer demand, the level of capacity in the intermodal industry and modal shifts between truck and rail intermodal shipping affect intermodal rail revenue.

As of the end of fiscal year 2016, our intermodal segment had approximately 1,250 trucks (primarily company), 17,700 dry van intermodal containers and 6,300 company-owned chassis. Revenue (excluding fuel surcharge) for the intermodal segment in 2016, consistent with how revenues are reported internally for segment purposes, was $757.5 million.

Logistics

Our logistics segment offers three services: brokerage, supply chain and import/export. We generate logistics segment brokerage services revenue by executing movement of freight for our customers using third-party equipment and authority. Generally, we generate supply chain services (including 3PL) revenue based upon either a flat amount per transaction or on consulting and management fees. We generate import/export services revenue based upon the number of orders handled and in some circumstances the time the product is stored in company-operated warehouses.

In fiscal year 2016, our logistics brokerage service executed approximately 417,000 orders, our supply chain service (including 3PL) operation managed approximately $1.5 billion of transportation spend on behalf of customers and our import/export services operation managed over 6.1 million square feet monthly. Revenue (excluding fuel surcharge) for the logistics segment in fiscal year 2016, consistent with how revenues are reported internally for segment purposes, was $737.7 million.

The following tables summarize, for the periods indicated, revenue and operating earnings by segment.

Revenue by Segment

 

($ in thousands)    Year Ended December 31,  
     2016      2015     2014  

Truckload

   $ 2,090,953      $ 1,976,970     $ 1,861,867  

Intermodal

     757,530        789,521       722,724  

Logistics

     737,690        638,648       587,778  

Other

     240,474        255,455       233,324  

Fuel surcharge

     294,040        371,152       606,858  

Inter-segment eliminations

     (74,951)        (72,374     (71,975
  

 

 

    

 

 

   

 

 

 

Operating revenue

   $ 4,045,736      $ 3,959,372     $ 3,940,576  
  

 

 

    

 

 

   

 

 

 

 

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Operating Earnings by Segment

 

($ in thousands)    Year Ended December 31,  
     2016      2015     2014  

Truckload

   $ 221,099      $ 217,363     $ 201,612  

Intermodal

     46,066        58,117       40,862  

Logistics

     30,751        25,455       18,127  

Other

     (7,511)        (40,695     (21,250
  

 

 

    

 

 

   

 

 

 

Income from operations

   $ 290,405      $ 260,240     $ 239,351  
  

 

 

    

 

 

   

 

 

 

Results of Operations—Reportable Segments

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Truckload

Truckload segment revenue (excluding fuel surcharge) for fiscal year 2016 was $2,091.0 million, an increase of $114.0 million, or 5.8%, compared to fiscal year 2015. The increase in truckload segment revenue (excluding fuel surcharge) was primarily due to increases in load volume and price as a result of our acquisition of Watkins & Shepard and Lodeso. Revenue per truck per week was $3,488, a decrease of $32, or 0.9%, compared to fiscal year 2015.

Truckload segment operating earnings for fiscal year 2016 was $221.1 million, an increase of $3.7 million, or 1.7%, compared to fiscal year 2015. The increase in truckload segment operating earnings was primarily due to increased revenue (excluding fuel surcharge) as cited above. The earnings contribution of revenue was offset by an increase of $29.6 million in equipment ownership costs due to upgrading our trailing equipment fleet, our acquisition of Watkins & Shepard and $4.3 million lower gains on equipment sales. Facility costs increased $7.4 million due to an expansion of our network footprint and a $2.0 million facility gain on sale recorded in 2015.

Intermodal

Intermodal segment revenue (excluding fuel surcharge) for fiscal year 2016 was $757.5 million, a decrease of $32.0 million, or 4.1%, compared to fiscal year 2015. Due to the competitive market and over-supply of truckload capacity, revenue per order was $1,986, down $54, or 2.7%, compared to fiscal year 2015. Intermodal volume was 1.4% lower and length of haul was 2.4% lower compared to fiscal year 2015.

Intermodal segment operating earnings for fiscal year 2016 was $46.1 million, a decrease of $12.1 million, or 20.7%, compared to fiscal year 2015. The decrease in intermodal segment operating earnings was primarily due to the decreased revenue (excluding fuel surcharge) as cited above and a $4.7 million lower gain on equipment sales.

Logistics

Logistics segment revenue (excluding fuel surcharge) for fiscal year 2016 was $737.7 million, an increase of $99.0 million, or 15.5%, compared to fiscal year 2015. Brokerage load volume increase of 27.0% and new customer business were the primary drivers of the increase in revenue.

Logistics segment operating earnings for fiscal year 2016 was $30.8 million, an increase of $5.3 million, or 20.8%, compared to fiscal year 2015. The increase in logistics segment operating earnings was primarily due to the increased revenue (excluding fuel surcharge) as cited above offset by $4.0 million of increased facility costs primarily due to new business. Brokerage net revenue per order decreased 11.4% compared to fiscal year 2015 primarily due to market softness.

 

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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Truckload

Truckload segment revenue (excluding fuel surcharge) for fiscal year 2015 was $1,977.0 million, an increase of $115.1 million, or 6.2%, compared to fiscal year 2014. The revenue increase was primarily due to improvements in our revenue management and network capabilities and new business wins. Load volume increased 5.9% and price increased 1.6%. Revenue per truck per week for fiscal year 2015 was $3,520 compared to $3,518 for fiscal year 2014 primarily due to improved price.

Truckload segment operating earnings for fiscal year 2015 was $217.4 million, an increase of $15.8 million, or 7.8%, compared to fiscal year 2014. The change was primarily due to the increased revenue (excluding fuel surcharge) as cited above offset by increased driver and owner operator costs of $92.9 million due to increased miles, driver pay increases to align with the market and changes to our owner operator rate structure.

Intermodal

Intermodal segment revenue (excluding fuel surcharge) for fiscal year 2015 was $789.5 million, an increase of $66.8 million, or 9.2%, compared to fiscal year 2014. Despite port labor issues, intermodal segment orders for fiscal year 2015 were 386,929, an increase of 10,037, or 2.7%, compared to fiscal year 2014. Revenue per order for fiscal year 2015 increased by $123, or 6.4%, compared to fiscal year 2014 due to a 4.9% increase in price and a 1.3% increase in length of haul.

Intermodal segment operating earnings for fiscal year 2015 was $58.1 million, an increase of $17.3 million, or 42.2%, compared to fiscal year 2014 primarily due to the increased revenue (excluding fuel surcharge) as cited above. The earnings contribution of the increased revenue was offset by an increase of $43 in rail pay per order due to a longer length of haul and increased rail rates.

Logistics

Logistics segment revenue (excluding fuel surcharge) for fiscal year 2015 was $638.6 million, an increase of $50.9 million, or 8.7%, compared to fiscal year 2014. Despite excess market capacity, brokerage load volume increased 29.6%. Strong market demand and new customer business also contributed to the increase in revenue.

Logistics segment operating earnings for fiscal year 2015 was $25.5 million, an increase of $7.3 million, or 40.4%, compared to fiscal year 2014. The increase in logistics segment operating earnings was primarily due to increased revenue (excluding fuel surcharge) as cited above and operational efficiencies which resulted in a 1.4% decrease in warehouse labor costs as a percentage of revenue compared to fiscal year 2014.

See the notes to our consolidated financial statements for additional information regarding our reportable segments.

Liquidity and Capital Resources

Our primary uses of cash are working capital requirements, capital expenditures and debt service requirements. Additionally, from time to time, we may use cash for acquisitions and other investing and financing activities. Working capital is required principally to ensure we are able to run the business and have sufficient funds to satisfy maturing short-term debt and upcoming operational expenses. Our capital expenditures consist primarily of transportation equipment and IT-related assets.

Historically, our primary source of liquidity has been cash flow from operations. In addition, we also have a $250 million revolving credit facility and a $200 million accounts receivable facility to provide us with an

 

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additional source of liquidity. We anticipate that cash generated from operations together with amounts available under our credit facilities will be sufficient to meet our future working capital requirements, capital expenditures and debt service obligations as they become due for the foreseeable future. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. In the event that we need access to additional cash, we may not be able to access the credit markets on commercially acceptable terms or at all. Our ability to fund future operating expenses and capital expenditures and our ability to meet future debt service obligations or refinance our indebtedness will depend on our future operating performance, which will be affected by general economic, financial and other factors beyond our control, including those described under “Risk Factors.”

The following table presents, as of the dates indicated, our cash and cash equivalents and debt:

 

($ in thousands)    As of December 31,  
     2016      2015      2014  

Cash and cash equivalents

   $ 130,787      $ 160,676      $ 149,885  
  

 

 

    

 

 

    

 

 

 

Debt:

        

Senior Notes

     500,000        500,000        320,000  

Accounts Receivable Facility

     135,000        30,000        145,000  

Revolving Credit Facility

                   28,900  

Equipment Financing

     49,296                

Capital Leases

     15,080        16,932        20,451  

Subordinated Notes

                    
  

 

 

    

 

 

    

 

 

 

Total debt

   $ 699,376      $ 546,932      $ 514,351  

We believe our liquid assets, cash generated from operations, and various financing arrangements will provide sufficient funds for our capital requirements for the foreseeable future.

Debt

Revolving Credit Facility

As of December 31, 2016, we had $245.9 million of unused availability (after giving effect to $4.1 million of outstanding letters of credit) under a revolving credit facility pursuant to a Credit Agreement, dated as of February 18, 2011 (as amended by the First Amendment to Credit Agreement dated as of November 21, 2013), among our subsidiary Schneider National Leasing, Inc. (as borrower), Schneider National, Inc. and certain of our subsidiaries (as guarantors), the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the “Revolving Credit Facility”). The Revolving Credit Facility matures in November 2018. The Revolving Credit Facility allows us to request an increase in the total commitment by up to $150 million. The Revolving Credit Facility also provides a sublimit of $100 million to be used for the issuance of letters of credit. At December 31, 2016, standby letters of credit under the Revolving Credit Facility amounted to $4.1 million and were primarily related to real estate leases. The applicable interest rate under the Revolving Credit Facility is based on the Prime Rate, the Federal Funds Rate or LIBOR, depending upon the specific type of borrowing, plus an applicable margin based on the Consolidated Net Debt Coverage Ratio as of the end of each fiscal quarter. At December 31, 2016, we had no borrowings outstanding under the Revolving Credit Facility.

 

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Senior Notes

As of December 31, 2016, we had the following series of senior notes outstanding:

 

($ in thousands)    Principal
Outstanding
     Issuance
Date
     Maturity
Date
     Interest
Rate

Senior Notes—2010

   $ 100,000        May 7, 2010        May 7, 2017      4.83%

Senior Notes—2013

   $ 30,000        September 25, 2013        September 25, 2020      2.91%
   $ 70,000        September 25, 2013        September 25, 2023      3.55%

Senior Notes—2014

   $ 40,000        November 10, 2014        November 10, 2019      2.76%
   $ 40,000        November 10, 2014        November 10, 2021      3.25%
   $ 40,000        November 10, 2014        November 10, 2024      3.61%

Senior Notes—2015

   $ 25,000        March 10, 2015        March 10, 2020      2.86%
   $ 60,000        March 10, 2015        March 10, 2022      3.35%
   $ 95,000        March 10, 2015        March 10, 2025      3.71%

The senior notes were issued by Schneider National Leasing, Inc. and are guaranteed by the company and certain of our subsidiaries. The senior notes may be redeemed pursuant to make-whole provisions set forth in the applicable note purchase agreement.

Accounts Receivable Facility

As of December 31, 2016, we had unused availability of $4.9 million (after giving effect to $135 million of outstanding borrowings) under a secured credit facility pursuant to the Accounts Receivable Facility among Schneider Receivables Corporation (as seller), Schneider National, Inc. (as servicer) and Wells Fargo Bank, N.A., as administrative agent and L/C issuer. The Accounts Receivable Facility matures in December 2017. The terms of the Accounts Receivable Facility allow funds to be borrowed at rates based on the 30-day LIBOR. The Accounts Receivable Facility allows for the issuance of letters of credit. At December 31, 2016 we had $135 million of outstanding borrowings under the Accounts Receivable Facility. We issued $60.1 million in standby letters of credit under the Accounts Receivable Facility primarily related to insurance obligations.

Covenants

Our financing arrangements require us to maintain certain covenants and financial ratios. Our Revolving Credit Facility contains various financial and other covenants, including required minimum consolidated net worth, consolidated net debt, limitations on indebtedness, transactions with affiliates, shareholder debt and restricted payments. Our parent guaranty of the outstanding senior notes subjects us to various financial and other covenants, including a maximum ratio of consolidated adjusted debt to consolidated EBITDA, a minimum consolidated net worth, and limitations on liens, priority debt, asset sales and transactions with affiliates. In addition, our Revolving Credit Facility and senior notes contain change of control provisions pursuant to which a change of control is defined to mean the Schneider family no longer owns more than 50% of the combined voting power of our capital stock.

As of December 31, 2016, we were in compliance with the covenants and financial ratios under the Revolving Credit Facility and the note purchase agreements governing the senior notes. The covenants were originally established with reference to our historical financial statements prepared under accounting standards applicable to private companies. In preparing our financial statements in accordance with certain accounting guidance and rules of the Securities and Exchange Commission applicable to public companies, we were required to change our accounting for common shares. Such change in accounting resulted in all of our shares being classified outside of shareholders equity as redeemable common shares, resulting in our failure to meet the minimum consolidated net worth covenant as originally written.

 

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A limited waiver and consent was received on December 21, 2016 from more than 50% of the participants in the credit agreements and senior notes, permitting us to calculate our minimum consolidated net worth ratio as if the reclassified temporary equity constituted permanent equity, which results in our minimum consolidated net worth meeting the terms of the minimum consolidated net worth covenant. The limited waiver terminates upon the earliest of (i) after the close of business on December 31, 2017, (ii) the date upon which this offering is completed or (iii) the withdrawal of the registration statement of which this prospectus is a part.

We have modified the terms of the relevant shareholder agreements, effective as of the time of effectiveness of the registration statement of which this prospectus is a part, such that all common shares will be classified as permanent equity in shareholders’ equity, accomplishing compliance with the minimum consolidated net worth covenant consistent with past periods.

We intend to use the net proceeds of this offering for general corporate purposes including potential acquisitions, repayment of indebtedness and capital expenditures. See “Use of Proceeds.”

We may from time to time seek to retire or purchase our outstanding debt through cash purchases, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

This summary of our credit facilities and other financing arrangements does not purport to be complete and is subject to and qualified in its entirety by reference to, the underlying agreements, which are filed as exhibits to the registration statement of which this prospectus is a part.

Capital Expenditures

The following table sets forth, for the dates indicated, our total capital expenditures. The sources of cash for such capital expenditures were primarily cash flows from operations and, to a lesser extent, working capital and borrowings.

 

($ in thousands)    Year Ended December 31,  
     2016      2015      2014  

Transportation equipment

   $ 422,142      $ 441,764      $ 463,795  

Other property and equipment

     37,002        41,020        23,904  

Acquisition of businesses

     78,221                
  

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 537,365      $ 482,784      $ 487,699  

Cash Flows

The following table summarizes, for the periods indicated, the changes to our cash flows provided by (used in) operating, investing and financing activities. It has been derived from our financial statements included elsewhere in this prospectus:

 

($ in thousands)    Year Ended December 31,  
     2016      2015     2014  

Cash provided by (used in) operating activities

   $ 455,313      $ 485,557     $ 345,749  

Cash provided by (used in) investing activities

     (513,347)        (483,302     (475,724

Cash provided by (used in) financing activities

     28,145        8,536       109,028  

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

As of December 31, 2016, we had $130.8 million of cash and cash equivalents, a decrease of $29.9 million compared to December 31, 2015. The following discussion summarizes changes to our cash flows from operating, investing and financing activities for fiscal year 2016 compared to fiscal year 2015.

 

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Operating Activities: For fiscal year 2016, cash provided by operating activities was $455.3 million. Compared to fiscal year 2015, the decrease of $30.2 million, or 6.2%, was primarily due to a reduction in the gain on sale of assets and deferred taxes as well as fluctuation in other working capital items, offset by increased earnings and depreciation.

Investing Activities: For fiscal year 2016 cash used by investing activities was $513.3 million. Compared to fiscal year 2015, the increase of $30.0 million, or 6.2%, was primarily due to the acquisition of Watkins & Shepard and Lodeso, offset by a reduction in new equipment leases.

Financing Activities: For fiscal year 2016, cash provided by financing activities was $28.1 million. Compared to fiscal year 2015, the increase of $19.6 million primarily resulted from additional borrowings under our revolving credit facility to fund the acquisition of Watkins & Shepard and Lodeso.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

At December 31, 2015, we had $160.7 million of cash and cash equivalents, an increase of $10.8 million compared to December 31, 2014. The following discussion summarizes changes to our cash flows from operating, investing and financing activities for fiscal year 2015 compared to fiscal year 2014.

Operating Activities: For fiscal year 2015, cash provided by operating activities was $485.6 million. Compared to fiscal year 2014, the increase of $139.8 million, or 40.4%, was primarily due to increased net income, deferred taxes (primarily from accelerated tax depreciation on revenue equipment) and accounts payable and reduced accounts receivable (primarily from lower fuel surcharge receivables).

Investing Activities: For fiscal year 2015, cash used by investing activities was $483.3 million. Compared to fiscal year 2014, the increase of $7.6 million, or 1.6%, was primarily due to increased leased equipment receivables offset by increased proceeds from sale of property and equipment.

Financing Activities: For fiscal year 2015, cash provided by financing activities was $8.5 million. Compared to fiscal year 2014, the decrease of $100.5 million was primarily due to net repayments of our revolving credit facility driven by strong cash flows.

Contractual Obligations

We are committed to making cash payments in the future on long-term debt, capital leases, operating leases, and purchase commitments. We have not guaranteed the debt of any other party. The following table summarizes our contractual cash obligations as of December 31, 2016 for each of the periods indicated:

 

Contractual Obligations

($ in thousands)

   Payments due by period  
     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Long-term debt obligations—principal

   $ 500,000      $ 100,000      $ 95,000      $ 100,000      $ 205,000  

Long-term debt obligations—interest

     88,182        15,871        38,905        19,222        14,184  

AR securitization facility

     135,000        135,000                       

Equipment financing notes—principal

     49,296        19,504        26,942        1,975       
875
 

Equipment financing notes—interest

     2,889        1,436        1,300        143        10  

Capital lease obligations—principal

     15,080        4,260        10,820                

Capital lease obligations—interest

     1,027        486        542                

Operating lease obligations

     122,575        35,961        65,056        21,558         

Purchase obligations

     120,892        120,892                       

Other long-term liabilities

     71,213        23,738        47,475                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,106,154      $ 457,148      $ 286,038      $ 142,899      $ 220,069  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The contractual obligations table is presented as of December 31, 2016. The amount of these obligations can be expected to change over time as new contracts are initiated and existing contracts are completed, terminated or modified.

Operating Leases

We have no off balance sheet arrangements other than our operating leases. Please see “—Cash Flows–Contractual Obligations.”

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in certain commodity prices, foreign currency exchange rates, and interest rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. We have established policies, procedures and internal processes governing our management of market risk and the use of financial instruments to manage our exposure to such risk.

Commodity Risk

We have commodity exposure with respect to fuel used in company-owned tractors. Further increases in fuel prices will continue to raise our operating costs, even after applying fuel surcharge revenue. Historically, we have been able to recover a majority of fuel price increases from our customers in the form of fuel surcharges. The average diesel price per gallon in the United States, as reported by the DOE, declined from an average of $2.71 per gallon for fiscal year 2015 to an average of $2.30 per gallon for fiscal year 2016. We cannot predict the extent or speed of potential changes in fuel price levels in the future, the degree to which the lag effect of our fuel surcharge programs will impact us as a result of the timing and magnitude of such changes, or the extent to which effective fuel surcharges can be maintained and collected to offset future increases. We generally have not used derivative financial instruments to hedge our fuel price exposure in the past, but continue to evaluate this possibility.

Interest Rate Risk

We had cash and cash equivalents of $130,787 as of December 31, 2016, which consists of bank deposits with FDIC participating banks and investments of $52,489. The cash on deposit with banks is not susceptible to interest rate risk.

U.S. agency obligations, certificates of deposit and Treasuries are classified as available for sale and carried at fair value, with any unrealized gains and losses, net of tax, included as a component of other comprehensive income (loss).

There were no identified events or changes in circumstances that had a significant adverse effect on the values of these investments. If there were evidence of a decline in value, which is other than temporary, the amounts would be written down to their estimated recoverable value.

We have interest rate exposure arising from our existing revolving credit facility and accounts receivable securitization facility, which have variable interest rates. These variable interest rates are impacted by changes in short-term interest rates. We manage interest rate exposure through a mix of variable rate debt, fixed rate senior debt, fixed rate financing, and fixed rate lease financing. At December 31, 2016, we had outstanding variable rate borrowings of $135,000 under the accounts receivable securitization facility which is subject to LIBOR interest rates. Assuming the current level of borrowing under this facility, a hypothetical one-percentage point increase in LIBOR rates would increase our annual interest expense by $1,350.

 

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Inflation Risk

Inflation can have an impact on our operating costs. A prolonged period of inflation could cause interest rates, fuel, wages and other costs to increase, which would adversely affect our results of operations unless freight rates correspondingly increase. However, we do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Foreign Exchange Risk

Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations, or cash flows. Foreign currency transaction gains and losses have not been material to our results of operations. We are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign investment. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.

Critical Accounting Policies

The preparation of our financial statements in accordance with United States generally accepted accounting principles requires that management make estimates and assumptions that impact the amounts reported in our Consolidated Financial Statements and accompanying notes. Therefore, these estimates and assumptions affect reported amounts of assets, liabilities, revenue, expenses and associated disclosures of contingent liabilities. Management evaluates these estimates on an ongoing basis, utilizing historical experience, consultation with third parties and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recognized in the accounting period in which the facts that give rise to the revision become known. We consider our critical accounting policies and estimates to be those that require us to make more significant judgments and estimates when we prepare our financial statements and include the following:

Claims Accruals

Reserves are established based on estimated or expected losses for claims. The primary claims arising for the company consist of cargo liability, personal injury, property damage, collision, comprehensive, workers’ compensation and associate medical expenses. We maintain self-insurance levels for these various areas of risk and have established reserves to cover these self-insured liabilities. We also maintain insurance to cover liabilities in excess of the self-insurance amounts. The reserves represent accruals for the estimated self-insured portion of pending claims, including adverse development of known claims, as well as incurred but not reported claims. Our estimates require judgments concerning the nature and severity of the claim, historical trends, advice from third-party administrators and insurers, consultation with actuarial experts, the specific facts of individual cases, the jurisdictions involved, estimates of future claims development and the legal and other costs to settle or defend the claims. The actual cost to settle our self-insured claim liabilities can differ from our reserve estimates because of a number of uncertainties, including the inherent difficulty in estimating the severity of a claim and the potential amount to defend and settle a claim. We have significant exposure to fluctuations in the number and severity of claims. If there is an increase in the frequency and severity of claims, or we are required to accrue or pay additional amounts if the claims prove to be more severe than originally assessed, or any of the claims would exceed the limits of our insurance coverage, our profitability would be adversely affected.

 

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In addition to estimates within our self-insured retention, we also must make judgments concerning our coverage limits. If any claim were to exceed our coverage limits, we would have to accrue for the excess amount. Our critical estimates include evaluating whether a claim may exceed such limits and, if so, by how much. Currently, we are not aware of any such claims. If one or more claims were to exceed our effective coverage limits, our financial condition and results of operations could be materially and adversely affected.

Depreciation of Property and Equipment

We operate a significant number of trucks, trailers, containers, chassis and other equipment in connection with our business and must select estimated useful lives and salvage values for calculating depreciation. Property and equipment is stated at cost less accumulated depreciation. It is depreciated to an estimated salvage value using the straight-line method over the asset’s estimated useful life. Depreciable lives of revenue equipment range from 4 to 20 years and are based on historical experience, as well as future expectations regarding the period we expect to benefit from the assets and company policies around maintenance and asset replacement. Estimates of salvage value at the expected date of sale are based on the expected market values of equipment at the expected time of disposal. We consider our experience with similar assets, conditions in the used revenue equipment market and operational information such as average annual miles. We periodically review the reasonableness of our estimates regarding useful lives and salvage values of our revenue equipment and adjust these assumptions appropriately when warranted. We review our property and equipment whenever events or circumstances indicate the carrying amount of the asset may not be recoverable. An impairment loss equal to the excess of carrying amount over fair value would be recognized if the carrying amount of the asset is not recoverable.

Goodwill and Other Intangible Assets

To expand our business offerings, we have, on occasion, acquired other companies. In a business combination, the consideration is first assigned to identifiable assets and liabilities, including customer lists and earn-out contracts, based on estimated fair values, with any excess recorded as goodwill. Determining fair value requires significant estimates and assumptions based on an evaluation of a number of factors, such as marketplace participants, history and future expansion expectations, amount and timing of future cash flows and the discount rate applied to the cash flows.

Goodwill is not amortized and is assessed for impairment at least annually. Goodwill is evaluated using a two-step impairment test at the reporting unit level. A reporting unit can be a segment or business within a segment. The first step compares the carrying value of a reporting unit, including goodwill, with its fair value, as determined by its discounted cash flows. Discounted cash flows are primarily based on growth rates for sales and operating profit which are inputs from our annual long-range planning process. Additionally, they are also impacted by estimates of discount rates, perpetuity growth assumptions and other factors. If the carrying value of a reporting unit exceeds its fair value, we complete the second step to determine the amount of goodwill impairment loss that we should record, if any. In the second step, we determine an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The amount of impairment loss is equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill.

Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted growth rates and our cost of capital, are based on the best available market information and are consistent with our internal forecasts and operating plans. These assumptions could be adversely impacted by certain risks discussed in earlier in this document.

 

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Income Taxes

We account for income taxes under the asset and liability method, in accordance with ASC 740-10, Income Taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If we ever estimated that it is more likely than not that all or some portion of specific deferred tax assets will not be realized, we must establish a valuation allowance for the amount of the deferred tax assets that are determined not to be realizable. Accordingly, if the facts or financial results were to change in such a way as to impact the likelihood of realizing the deferred tax assets, we would have to apply judgment to determine the amount of valuation allowance required in the appropriate period.

We recognize a liability from unrecognized tax benefits when the benefits of tax positions taken on a tax return are not more likely than not to be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. See Note 9, Income Taxes, to the audited consolidated financial statements included elsewhere in this prospectus for a discussion of our current tax contingencies.

 

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BUSINESS

Company Overview

We are a leading transportation and logistics services company providing a broad portfolio of premier truckload, intermodal and logistics solutions and operating one of the largest for-hire trucking fleets in North America. We believe we have developed a differentiated business model that is difficult to replicate due to our scale, breadth of complementary service offerings and proprietary technology platform. Our highly flexible and balanced business combines asset-based truckload services with asset-light intermodal and non-asset logistics offerings, enabling us to serve our customers’ diverse transportation needs. Since our founding in 1935, we believe we have become an iconic and trusted brand within the transportation industry by adhering to a culture of safety “first and always” and upholding our responsibility to our associates, our customers and the communities that we serve.

We are the second largest truckload company in North America by revenue, one of the largest intermodal transportation providers in North America by revenue and an industry leader in specialty equipment services and e-commerce fulfillment. We categorize our operations into the following reportable segments:

 

    Truckload – which consists of freight transported and delivered with standard and specialty equipment by our company-employed drivers in company trucks and by owner-operators. Our truckload services include standard long-haul and regional shipping services primarily utilizing dry van equipment and bulk, temperature controlled, final mile “white glove” delivery and customized solutions for high-value and time-sensitive loads. These services are executed through either for-hire or dedicated contracts.

 

    Intermodal – which consists of door-to-door, container on flat car service by a combination of rail and over-the-road transportation, in association with our rail carrier partners. Our intermodal service offers vast coverage throughout North America, including cross-border freight through company containers and trucks.

 

    Logistics – which consists of non-asset freight brokerage services, supply chain services (including 3PL) and import/export services. Our logistics business typically provides value-added services using third-party capacity, augmented by our assets, to manage and move our customers’ freight.

In addition, we engage in equipment leasing to third parties through our wholly owned subsidiary Schneider Finance, Inc. (SFI), which is primarily engaged in leasing trucks to owner-operators, including owner-operators with whom we contract. We also provide insurance for both the company and owner-operators through our wholly owned insurance subsidiary and conduct limited China-based trucking operations consisting primarily of truck brokerage services.

Our portfolio consists of approximately 10,500 company and 2,850 owner-operator trucks, 37,900 trailers and 18,100 intermodal containers across North America and approximately 19,300 enterprise associates. We serve a diverse customer base across multiple industries and serve approximately 16,000 customers, including nearly 200 Fortune 500 companies. Each day, we transit over 8.9 million miles, equivalent to circling the globe approximately 360 times. Our logistics business manages nearly 23,000 qualified carrier relationships and, in 2016, managed approximately $2 billion of third-party freight. In addition, we have established a network of facilities across North America in order to maximize the geographic reach of our company trucks and owner-operators and provide maintenance services and personal amenities for our drivers. Our portfolio diversity, network density throughout North America and large fleet allow us to provide an exceptional level of service to our customers and consistently excel as a reliable partner, especially at times of peak demand.

 

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We believe we offer one of the broadest arrays of services in the transportation and logistics industries, ranging from dry van to bulk transport, intermodal to supply chain management and first to final mile “white glove” delivery. We believe we differentiate ourselves through expertise in services that utilize specialty equipment, which have high barriers to entry. With our recent acquisitions of Watkins & Shepard and Lodeso, we have established a national footprint and expertise in shipping difficult-to-handle consumer items, such as furniture, mattresses and other household goods, which based on internal research conducted by management have been in the forefront of the transition in consumer purchasing patterns to the e-commerce channel. Our comprehensive and integrated suite of industry leading service offerings allows us to better meet customer needs and capture a larger share of our customers’ transportation spend. Customers value our breadth of services, demonstrated by 21 of our top 25 customers utilizing services from all three of our reportable segments.

The following graphic demonstrates the breadth and diversity of our service offerings:

 

LOGO

In 2007, we launched Quest, a multi-year, comprehensive business processes and technology transformation program, using technology from our strategic development partner, Oracle Corporation. As part of this transformation, we created a quote-to-cash technology platform, which we refer to as our Quest platform, that serves as the backbone of our business and seamlessly integrates all business lines and functions. Our state-of-the-art Quest platform allows us to make informed decisions at every level of our business, providing real-time data analytics to optimize network density and equipment utilization across our entire network, which drives better customer service, operational efficiency and load optimization. We also realigned our organization to give our associates a direct line of sight to profit-and-loss responsibility both within their business lines and across the organization. This organizational change combined with our Quest platform empowers our associates to proactively pursue business opportunities that enhance profitability while maintaining high levels of customer service. We believe our over $250 million investment in technology and our related organizational realignment over the past several years have enabled us to improve our profit margins and put us in a favorable position to expand our profit margins and continue growing our business.

 

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Since refocusing our strategy and initiating our Quest technology and business transformation in 2007, we have experienced strong revenue growth and margin expansion, which is demonstrated in the following table:

 

(in thousands)    2016 Fiscal Year      3-Year CAGR(1)  

Operating revenue

   $ 4,045,736,036        3.7

Adjusted enterprise revenue (excluding fuel surcharge)(2)

   $ 3,751,696,292        7.7

Net income

   $ 156,851,265        18.0

Adjusted EBITDA(3)

   $ 559,130,019        13.1

Adjusted net income(3)

   $ 158,443,482        17.7

 

(1) Three-year compound annual growth rate from January 1, 2014 through December 31, 2016.
(2) Adjusted enterprise revenue (excluding fuel surcharge) is a non-GAAP financial measure. For a reconciliation of operating revenue, the most closely comparable GAAP measure, to adjusted enterprise revenue (excluding fuel surcharge), see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”
(3) Adjusted EBITDA and adjusted net income are non-GAAP financial measures. For a reconciliation of net income to adjusted EBITDA and adjusted net income, in each case for which net income is the most comparable GAAP measure, see “—Summary Historical Consolidated Financial and Other Data.”

We were founded in 1935 by Al J. Schneider in Green Bay, Wisconsin, who sold the family car to buy the first truck for the business that would become Schneider. His son, Donald J. Schneider, followed in his father’s footsteps to become our chief executive officer, and began our expansion from a United States company to one with international reach. Our deeply-rooted culture embodies several core values that Al and Donald Schneider established:

 

    Safety First and Always: We have a responsibility to our associates, customers and the community to operate safely. Nothing we do is worth harming ourselves or others.

 

    Integrity in Every Action: We do what we say. We conduct our business with the highest ethical standards.

 

    Respect for All: We treat everyone with dignity and respect. We embrace diversity of thought, experience and background.

 

    Excellence in What We Do: We do not stop until we have delivered a superior experience. We have a relentless passion for innovation and improvement.

We put these values into practice through the Schneider “Value Triangle” of operational excellence. A guiding tenet of our business for over a decade, our “Value Triangle” provides a key reference for our associates to consider when making business decisions at each level of the company, including the needs of our customers, our associates and our business and its shareholders. We believe managing and balancing these often competing interests compels us to weigh the collective benefits to all of our stakeholders for every business decision.

 

 

LOGO

 

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Industry and Competition

Truckload

Trucking is the primary means of serving the North American transportation market and hauls approximately 70% of freight volume within the United States, which is embodied in a common phrase used within our industry: “if you’ve got it—a truck brought it.” Trucking continues to attract shippers due to the mode’s cost advantages relative to air transportation and flexibility relative to rail. Truckload growth is largely tied to U.S. economic activity such as GDP growth and industrial production and moves in line with changes in sales, inventory and production within various sectors of the U.S. economy, including manufactured goods, construction products and bulk commodities. Truckload volumes are also positioned to benefit from secular trends in e-commerce retail, which is expected to grow at a 13% CAGR from 2014 to 2019 according to e-Marketer. Based on estimates by the ATA, the U.S. trucking industry generated approximately $726 billion in revenue in 2015 and is expected to grow at a CAGR of 4.8% from 2016 to 2022.

The U.S. truckload industry sector comprises the use of dry van and specialty equipment. Both dry van and specialty equipment are used to transport goods over a long-haul and on a regional basis. Dry van carriers represent an integral component of the transportation supply chain for most retail and manufactured goods in North America. Specialty carriers employ equipment such as flat-bed trucks, temperature controlled trailers, over-sized trailers and bulk transport, dump and waste equipment. These carriers can transport temperature controlled products and bulk commodities such as specialty chemicals and petrochemicals. Specialty equipment offering is characterized by higher equipment costs and more extensive driver training requirements relative to dry van offerings, resulting in higher barriers to entry and creating opportunities for differentiated value propositions for customers.

The U.S. truckload industry is large and fragmented, characterized by many small carriers with revenues of less than $1 million per year, less than 50 carriers with revenues exceeding $100 million per year and 10 carriers with revenues exceeding $1 billion per year, according to 2015 data published by Transport Topics, an ATA publication. According to Department of Transportation data, there were over 550,000 trucking companies in the United States at the end of 2015, approximately 90% of which owned 10 or fewer trucks. The 25 largest for-hire truckload carriers are estimated to comprise approximately 8% of the total for-hire truckload revenue, according to Transport Topics.

Regulations and initiatives to improve the safety of the U.S. trucking industry have impacted industry dynamics. We believe the recent trend is for industry regulation to become progressively more restrictive and complex, which constrains the overall supply of trucks and drivers in the industry. Examples of recently enacted and upcoming regulations and initiatives include the Comprehensive Safety Analysis (CSA) initiative (2010), Hours of Service (HOS) rules (2013) and mandatory use of electronic logging devices to enforce Hours of Service (HOS) rules (2015), hair follicle (2016) and sleep apnea screening (upcoming), installation of speed limiters (2016) and phase 2 emission standards (2016). We believe small carriers will likely be challenged to maintain the utilization required for acceptable profitability under this regulatory framework.

Domestic Intermodal

“Domestic” or “North American domestic” intermodal is the term used within the trucking industry to refer to intermodal operations within North America (such as a shipment by rail and by truck either all within the United States or from Canada, through the United States and into Mexico). Domestic intermodal transportation involves the transportation of freight in a 53-foot container or trailer, combining multiple modes of transportation (rail and truck) within the United States, Canada and Mexico. Eliminating the need for customers to directly handle freight when changing modes between rail and truck, intermodal transportation holds significant productivity, cost and fuel-efficiency advantages when moving mass freight. Containers are typically moved from truck onto rail and then back onto trucks before they reach their final destination. Domestic intermodal

 

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volumes are largely driven by over-the-road conversions from truckload to intermodal and from the volume of overseas imports into the United States, such as from China. Our management estimates the North American intermodal and drayage market to be $22 billion. According to AAR, intermodal has grown from 27% of all railcar loads in 1990 to 49% in 2015. Domestic intermodal accounts for 50% of total intermodal volume according to the IANA. With fuel costs likely to increase in the long-term, fuel efficiency regulations set to tighten and labor shortages in the trucking industry, the intermodal market is well-positioned to take on freight capacity as trucking markets face external pressures. The ATA estimates rail intermodal volumes will grow at 4.0% CAGR over the next five years.

The intermodal market is comprised of service providers of differing asset intensity, with customers being served by either non-asset intermodal marketing companies (IMCs) or asset-light network intermodal providers such as Schneider. While IMCs are the most prevalent intermodal solution provider, asset-light network intermodal providers offer differentiated higher-value solutions to customers given the reliability, geographic breadth and high service levels of company assets (trucks, containers and even chassis) compared to non-asset IMCs.

The domestic intermodal segment is highly consolidated, where the top three intermodal providers operate over 50% of the U.S. dry van domestic container fleet, according to management estimates. Network density, size and scale are critical barriers to entry in the intermodal market. Increasing sophistication and complexity of shippers’ needs require network density and the ability to deliver reliable capacity. According to AAR, railroads have been spending record amounts in recent years to maintain and improve their infrastructure and equipment, which we believe supports growth of the intermodal industry and improves the efficiency and reliability of the railroad component of our intermodal service.

 

 

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Logistics

The logistics industry is a large, fast-growing and fragmented market that represents an integral part of the global economy. Global trade has grown at twice the rate of global GDP over the last two decades. As supply chain complexity increases, corporations have elected to focus on innovation, design, sales and marketing of their products rather than supply chain operations. Increased material costs coupled with enhanced global competition impose margin pressure on manufacturers, requiring the outsourcing of noncore transportation logistics to supply

 

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chain specialists who offer a combination of scale, strong technology platforms and lower costs. Additionally, more shipments of inputs and products will be transported using multiple modes and technical expertise, driving shipper preferences for logistics providers with an asset-based network to complement their third-party capacity. Transportation asset owners often provide logistics services to meet excess demand and provide customers with greater breadth of services.

Our Competitive Strengths

We benefit from significant scale, as well as competitive margins and compelling returns on invested capital, in each of our three reportable segments. Our unique and balanced business mix as compared to our peers creates resiliency across business cycles. Specifically, we believe the following key strengths have been instrumental to our success and position us well to continue growing our business and market share:

Iconic large-scale diversified North American truckload provider with a modern fleet

Over the past 80 years, we have become one of North America’s largest and most trusted providers of truckload services, including specialty equipment services. We have established a leading position through our commitment to provide an outstanding level of customer service. In 2016, we received 27 awards from customers and the media in recognition of our exceptional service and reliability. We operate one of North America’s largest truckload fleets with approximately 11,900 trucks and 37,900 trailers used in our truckload business. Given our large scale, we offer both network density and broad geographic coverage to meet our customers’ transportation needs across North America. Our scale and strong balance sheet provides us with access to capital necessary to consistently invest in our capacity, technology and people to drive performance and growth, and to comply with regulations. Our scale also gives us significant purchasing benefits in third-party capacity, fuel, equipment and MRO (maintenance, repair and operations), lowering our costs compared to smaller competitors.

Over the past several years, we have made significant investments in safety-enhancing equipment and technology, including roll stability, collision avoidance, forward facing cab cameras, training simulators and real-time truck sensor monitoring. Our relentless focus on safety not only enables us to better uphold our responsibility towards our associates, customers and the community, but also provides a critical competitive advantage in an industry with increasingly stringent safety and regulatory requirements and results in lower operating risk and insurance costs. As we have modernized our fleet, the average age of our total truck fleet has decreased to 2.9 years over the last several years, with over-the-road sleeper cab tractors at an average age of approximately 2.6 years. Furthermore, in 2010, we were among the first large-scale carriers to fully equip our fleet with EOBRs, providing improved network management and safety. Unlike carriers that have yet to undertake the electronic logging device implementation process, we have significant experience operating with EOBRs and are well-positioned to benefit from the upcoming legislation on mandatory electronic logging device standards, which we expect will tighten truckload capacity and subsequently increase rates.

Industry leading and highly scalable Quest technology platform integrated across all business lines and functions

Our early investment and adoption of next generation technology and data analytics is a competitive advantage. We believe we are the only truckload and intermodal industry player of size to have completed and culturally adopted a comprehensive quote-to-cash technology transformation that allows us to efficiently match capacity with customer loads/orders. Our Quest platform allows us to assess our entire network every 90 seconds, resulting in real-time, round-the-clock visibility into every shipment and delivery, route schedules, truck and driver capacity and the profitability of each load/order. Our Quest platform enables us to minimize unbilled miles, optimize driver efficiency and improve safety, resulting in increased service levels and profitability. We manage the purchasing of over 500,000 gallons of fuel per day and communicate to our drivers optimal timing and locations for refueling through our Quest platform, which increases our fuel efficiency and lowers our fuel

 

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purchasing costs. We have become a pioneer in applying “decision science” technology to trucking and intermodal freight that enhances driver and asset efficiency, leading to higher profitability and driver satisfaction. We receive and process millions of driver and equipment location updates daily, allowing us to select the optimal driver, truck and trailer for each load/order. This has been a key driver of increased profitability per load and operating margin improvements over the last few years. We believe that our Quest technology and business transformation provides us with a clear advantage within the transportation industry from which we are continuing to realize the financial benefits.

Leadership in fast-growing e-commerce, final mile and other specialty equipment markets

Our recent acquisitions of Watkins & Shepard and Lodeso have allowed us to rapidly expand our customized home, commercial and retail delivery offerings with “white glove” service for brick and mortar and e-commerce customers. New components of our final mile services include real-time shipment tracking for customers and our proprietary Simplex technology, which integrates with retailers’ e-commerce infrastructure, providing seamless end-to-end solutions and visibility for complex final mile deliveries. E-commerce has increasingly become the preferred channel for purchasing difficult-to-handle items, such as furniture and mattresses, an area in which Watkins & Shepard and Lodeso specialize. Our expertise in this channel and national footprint in the final mile market positions us well to capitalize on this high-growth market opportunity that traditional less-than-truckload and package delivery operations generally cannot serve.

We have established a major nationwide presence in numerous specialty equipment freight markets with premium pricing and higher barriers to entry, including bulk chemicals, energy services and other specialty liquids. Our large specialty equipment asset base positions us to serve customers across the country, which differentiates us from most of our regional-based competitors and positions us well to take market share with large customers who value our geographic reach.

A leading intermodal business with built-in cost reductions through transition to a company-owned chassis model driving profitability

We are currently one of the largest intermodal providers in North America by revenue and are well-positioned for future growth in intermodal freight through our nationwide network and company container model. We focus on intermodal service as an alternative to placing additional trucks and drivers in lanes for which rail service otherwise provides competitive service or that are significantly longer in distance. Our long-standing railroad relationships with BNSF Railway, CSX Transportation, Canadian National Railway, Kansas City Southern Railway and other regional rail carriers, such as Florida East Coast Railway, provide rail access nationwide. In addition, we have a significant presence in the North American cross-border intermodal market, crossing a border with an intermodal load 130 times each day. Our customers value our intermodal network over IMCs due to our consistent access to capacity through our company assets and high-quality drayage services that provide a larger geographic reach around intermodal terminals. We are in the process of converting from our rented chassis model, where we pay a rental fee to use chassis owned by a third-party chassis rental company, to a company-owned chassis model. This conversion will lower our all-in chassis operating costs, improve service reliability, as well as increase driver efficiency and satisfaction, by increasing our control over the chassis operations of our intermodal business. We expect to complete our conversion to a company-owned chassis fleet by December 2017. We believe that our balanced network and large base of company assets provide a significant competitive advantage that would be difficult for other carriers to replicate.

Fast-growing non-asset logistics business expanding our customer base and complementing our asset-based network

Our non-asset logistics business represents our fastest-growing segment and complements our asset-based businesses with freight brokerage services and comprehensive supply chain management. In the three years from January 1, 2014, through December 31, 2016, our logistics segment operating revenue grew at a CAGR of 16.5%. Our logistics business not only provides additional services to existing customers and incremental freight

 

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to our assets, but helps to facilitate the expansion of our customer base and offers opportunities for cross-selling our suite of services. In 2016, our logistics business helped generate approximately $147 million in revenue for our truckload and intermodal segments. The scale of our asset-based network and our relationships with over 20,000 third-party carriers allow us to provide our brokerage and supply chain services (including 3PL) to our customers at competitive rates. By also offering warehousing, trans-loading and port drayage, we can provide customers with a suite of services that covers their entire North American transportation supply chain.

Diversified and resilient revenue mix supporting stable growth through business cycles

Our diverse portfolio of services, equipment, customers and end markets allows for resilient and consistent financial performance through all business cycles. We believe we offer the broadest portfolio of services in our industry, including in our truckload business, which consists of freight transported and delivered with dry van and specialty equipment by drivers in company trucks and by owner-operators. In addition to both long-haul and regional shipping services, our truckload services include team-based shipping for time-sensitive loads (utilizing dry van equipment) and bulk, temperature controlled, final mile “white glove” delivery and customized solutions for high-value and time-sensitive loads (utilizing specialty equipment). Our primarily asset-based truckload business is complemented by our asset-light intermodal and non-asset logistics businesses. Asset-based operations have the benefit of providing shippers with certainty of capacity and continuity of operations, while non-asset operations generally have lower capex requirements, higher returns on invested capital and lower fixed costs. We also manage a balanced mix of spot rates and contracted rates, through for-hire and dedicated contracts, to take advantage of freight rate increases in the short-term while benefiting from more resilient contracted revenue. Our dedicated contracts typically average three years in duration and provide us with greater revenue stability across economic cycles, promote customer loyalty and increase driver retention due to higher predictability in number of miles along familiar routes and time at home.

Our broad portfolio also limits our customer and industry concentration as compared to other carriers. We receive revenue from a diversified customer base with no single customer representing 10% or more of our operating revenue. The percentage of our adjusted enterprise revenue (excluding fuel surcharge) derived from our top ten customers has decreased by approximately 810 basis points over the past five years. New business increased by approximately $450 million in 2016. We maintain a broad end-market footprint, encompassing over ten distinct industries including general merchandise, chemicals, electronics & appliances, and food & beverage, among others. Our diversified revenue mix and customer base drives stability throughout the fiscal year, even though many of our customers are affected by seasonal fluctuations. For example, our consumer goods and big box retail sales experience the greatest demand in the fourth quarter, whereas our food & beverage sales peak during the summer and the home improvement sales peak in spring and early summer, creating more balanced year-round demand. Our balanced revenue base allows for stable revenue and yield management through the fiscal year, allowing for more efficient seasonality management.

Proven and motivated management team with deep transportation industry expertise

We have a premier management team with extensive experience in the transportation and logistics industry, as well as a proven track record of success through various business environments. Our Chief Executive Officer and President, Christopher B. Lofgren, has over 22 years of experience at Schneider, a PhD in Industrial Engineering and is responsible for spearheading our Quest technology and business transformation. Our senior management team has spent on average over 14 years with Schneider and is composed of highly experienced transportation and logistics industry experts overseeing day-to-day operations. In their many years of collaboration, the management team has implemented strategic initiatives that have concentrated on increasing profitability and optimizing the portfolio of offerings, as well as leveraging technological innovation to manage revenue and drive horizontal integration across our reportable segments. Our management team’s compensation structure and ownership of common stock provide further incentive to improve business performance and profitability, aligning the senior team’s interests with our shareholders’. Our governance structure provides key independent oversight, complementing the strengths of the management team. A majority of the members of our

 

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Board of Directors are independent, a structure that has been in place since 1988. Our senior management team’s experience and commitment to upholding deeply-rooted values of safety, respect, integrity and excellence will continue to be critical to our future growth and performance. We believe our leadership team is well-positioned to execute our strategy and remains a key driver of our financial and operational success.

Our Growth Strategies

Our goals are to grow profitably, drive strong and consistent return on capital and increase stakeholder value. We believe our competitive strengths position us to pursue our goals through the following strategies:

Strengthen core operations to drive organic growth and maintain a leading market position

We intend to drive organic growth through leveraging our existing customer relationships, as well as expanding our customer base. With a broad, comprehensive service offering and a true North American footprint, we believe we have substantial cross-selling opportunities and the potential to capture a greater share of each customer’s annual transportation and logistics expenditures. We also plan to drive revenue growth by increasing market share amid a fragmented marketplace by marketing our services to customers seeking to outsource their transportation services. Our growth decisions are based on our “Value Triangle,” enabling us to grow sustainably and with balanced benefits for our three key stakeholders—our customers, our associates and our business and its shareholders. Our Quest platform serves as an instrumental factor in driving profitable growth from both new and existing customers as it enables real-time, data-driven decision support and business analysis of every load/order, assisting our associates in proactively cross-selling our broad suite of offerings. Together with our highly incentivized and proactive sales organization, our data-driven Quest platform will drive better service and organic growth in each of our reportable segments.

Expand capabilities in specialty equipment freight market and continue growing our freight brokerage business

We believe that our capabilities position us to grow in the specialty equipment market, which enjoys higher barriers to entry and a premium to conventional dry van pricing. The complexity and time-sensitivity of the loads often require enhanced collaboration with, and greater understanding of, our customers’ business needs and processes. The transportation of specialty equipment freight requires specially trained drivers with appropriate licenses and special hauling permits, as well as equipment that can handle items with unique requirements in terms of temperature, freight treatment, size and shape. As such, there are few carriers that have comparable network scale and capabilities in the specialty equipment market, which we believe will allow us to profitably grow in that segment.

Freight brokerage is another business where we have seen strong recent growth and expect to continue growing. The growth of our freight brokerage business, which is a significant part of our logistics segment, contributed to the growth of our logistics segment operating revenue, which grew at a CAGR of 16.5%, in the three years from January 1, 2014 through December 31, 2016. As shippers increasingly consolidate their business with fewer freight brokers, we are well-positioned to become one of their select providers due to our customer service and established, dense network of third-party carriers. Large shippers in particular see the value of working with providers like us that have scale, capacity and lane density, as they are more reliable, efficient and cost effective at covering loads. Our freight brokerage business provides us with the opportunity to serve our customers more broadly where we might not otherwise serve them, building diversity and resiliency in our existing customer portfolio in a non-asset manner with minimal capital deployment.

Capitalize on the growth of e-commerce fulfillment

As a leading “first, final and every mile” carrier for difficult-to-handle consumer items, such as furniture and mattresses, one of the fastest-growing e-commerce markets, we are well-positioned to capitalize on continued e-commerce growth. According to e-Marketer, the e-commerce industry is set to grow at four times the

 

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rate of traditional retail in North America (13% vs. 3% 2014-2019 CAGR) and is anticipated to reach 13% of total retail sales worldwide by 2019 (up from 6% in 2014). We provide services for many online retailers, offering first-to-final mile delivery from warehouses to consumer living rooms. Unlike many competitors, we have the technological capability, national footprint and the ability to utilize team driver capacity to provide network breadth and density to meet growing e-commerce fulfillment needs. We intend to leverage our end-market expertise, leading technology platform and end-to-end integrated capabilities to continue taking the complexity out of the supply chain for omni-channel retailers, further driving our revenue in the fast-growing e-commerce market.

Continue to improve our operations and margins by leveraging benefits from recent investments in our Quest technology and business transformation

We continue to benefit from our Quest technology and business transformation by improving the effectiveness with which we utilize data to increase revenue and lower costs. Full visibility into each driver’s profile allows us to increase associate satisfaction and retention by matching drivers to loads and routes that better fit their individual needs. We are able to better service customers, retain drivers and generate repeat business by anticipating our customers’ and drivers’ needs and preferences. We believe the future implementation of simple and intuitive customer interfaces will also enable a stronger connection with our customers through increased interaction and an enhanced user experience. We expect additional margin improvement as we continue to leverage data analytics within the Quest platform. The strong foundation we have established with our continuing Quest transformation will allow us to incorporate new technologies and build new capabilities into the platform over time, maintaining our competitive edge and setting the base for future growth.

Allocate capital across businesses to maximize return on capital, and selectively pursue opportunistic acquisitions

Our broad suite of services provides us with a greater opportunity to allocate growth capital in a manner that maximizes returns throughout the seasonal and economic business cycles. For example, we can efficiently move our equipment between services and regions when we see opportunities to maximize our return on capital. We continually monitor our performance to ensure appropriate allocation of capital and resources to grow our businesses while optimizing returns across reportable segments. Furthermore, our strong balance sheet enables us to selectively pursue opportunistic acquisitions that complement our current portfolio. We are positioned to leverage our scalable platform and experienced operations team to acquire high-quality businesses that meet our disciplined selection criteria in order to expand our service offerings and customer base.

Attract and retain top talent at all levels to ensure sustainable growth

Our people are our strongest assets, and we believe they are key to growing our customer base and driving our performance. Our goal is to attract, retain and develop the best talent in the industry across all levels. We strive to foster a collaborative environment and seek individuals who are passionate about our business and fit within our culture. We value the direct relationships we have with our associates and we intend to continue working together without third-party representation. Our compensation structure is performance-based and aligned with our strategic objectives. Amid today’s driver shortage environment, we seek to maintain our reputation as a preferred carrier within the driver community. Our culture, which from its founding was focused on the well-being of our associates, helps us attract and retain high quality drivers. In addition to mandatory physical check-ups, covering among other things sleep apnea, we enforce hair follicle drug testing alongside mandatory urine testing and invest in the well-being of our drivers, which we believe helps us maintain a high quality driver base. Our leading technology platform facilitates the application, screening and onboarding of top talent. As a stable industry leader with a respected safety culture and underlying core values, we believe that we will continue to be the employer of choice for both driving and non-driving associates.

 

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Customers

We offer our services to approximately 16,000 customers across our portfolio, including nearly 200 Fortune 500 companies. Our top 10 customers include Family Dollar, Ford Motor Co., Georgia Pacific, Home Depot, Kimberly Clark, Lowes Home Centers, PEPSICO Inc., Proctor & Gamble, Target Stores and Wal Mart. For the past five years, we have been focused on broadening our customer base to reduce exposure to a single customer by growing our small and medium shipper base. We believe a broader customer base promotes resilience in all market conditions, since it increases the likelihood that any weakness that affects a specific customer or customer industry will be mitigated by our exposure to customers in industries not affected by the same weakness. Moreover, different types of customers mitigate seasonal volatility. For example, our big box retailer and consumer goods manufacturer sales experience the greatest demand in the fourth quarter, whereas our food and beverage sales peak during the summer and the home improvement sales peak in spring and early summer, creating more balanced year-round demand.

Our brokerage business has approximately 175 inside sales representatives that primarily conduct business telephonically rather than in person, which promotes our effort to expand beyond our legacy relationships with large shippers by developing relationships with smaller shippers. Inside sales representatives are able to contact a greater number of shippers at a lower cost than other sales representatives, increasing the efficiency of our outreach to smaller shipping customers. They also may generate leads for the rest of our sales force. This broadens our customer base and provides a solid source of incremental prospects for the enterprise. With a broad, comprehensive service offering and a true North American footprint, we believe we have substantial cross-selling opportunities and the potential to capture a greater share of each customer’s annual transportation and logistics expenditures.

We believe our customer base represents a wide cross-section of industries with truckload needs. By diversifying our customer portfolio to include accelerated growth of the small and medium sized shipper, we have been reducing our dependence on big box retailers and consumer goods manufacturers whose truckload activity is disproportionately concentrated in the fourth quarter of each calendar year. Food and beverage is now a larger part of our customer portfolio. Peak activity for those shippers typically is higher earlier in the calendar year, which we believe balances the impact of seasonality on our business.

Reportable Segments

We categorize our operations into truckload, intermodal and logistics segments.

Truckload Segment

We are the second largest truckload carrier in North America by revenue. Our truckload segment consists of freight transported and delivered with dry van and specialty equipment by company-employed drivers in company trucks and owner-operators. In addition to both long-haul and regional shipping services, our truckload services include team-based shipping for time-sensitive loads (utilizing dry van equipment) and bulk, final mile “white glove” delivery and customized solutions for high-value and time-sensitive loads (utilizing specialty equipment). The principal types of freight we transport include retail store merchandise, consumer products, grocery products, perishables, food and beverage, bulk chemicals and manufactured products. We focus on transporting consumer nondurable products that generally ship more consistently throughout the year and whose volumes are generally more stable during a slowdown in the economy. We generate truckload segment revenue by hauling freight for our customers using our trucks or owner-operators’ equipment.

Our truckload services are executed through either for-hire or dedicated contracts. Generally, for-hire services are contracted on a spot rate basis and/or lane based contract pricing which tend to be for a short duration. Dedicated contracts, which are typically three years in duration, are those contracts in which we have agreed to assign specific truck and trailer capacity for use by a specific customer. Dedicated contracts often have predictable routes and revenue, are attractive to drivers, and frequently replace all or part of a shipper’s private fleet.

 

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Generally, our customers pay for our services based on the number of miles and for other ancillary services we provide. Our truckload segment operates within the United States and Canada, and cross-border with both Canada and Mexico. The graphic below illustrates our service offerings categorized according to trailing equipment and contract type.

 

LOGO

Our specialty equipment fleet is employed on both for-hire and dedicated contracts. The majority of our specialty trailer fleet is assigned to solve a specific supply chain problem for a specific customer under a dedicated contract.

Intermodal Segment

We are one of the largest intermodal providers in North America. Our intermodal segment accounted for 19% of our operating revenue for fiscal year 2016, and consists of door-to-door, container on flat car service by a combination of rail and over-the-road transportation, in conjunction with our rail carrier partners. Our intermodal service offers vast coverage throughout North America, including Transcontinental, Eastern Core and North American Cross-Border.

Our intermodal segment consists of over-the-road drayage and over-the-rail mixed mode operations with primarily a company container and truck fleet. Intermodal relies on rail carriers for the line haul movement of its containers and freight between rail ramps. Key railroad relationships include the BNSF Railway, CSX Transportation, Canadian National Railway, Kansas City Southern Railway and other regional rail carriers, such as Florida East Coast Railway. Our company trucks accomplish the origin and destination pickup and delivery services for the majority of our intermodal loads, while we use third-party dray carriers where economical or necessary.

The majority of drayage for our intermodal shipments is provided by a company fleet of approximately 1,250 trucks. We are in the process of converting our rented chassis to a lower cost, more reliable company-owned chassis. This will improve customer service and driver satisfaction, and we estimate that it will lower our chassis cost by approximately 55% when fully converted at the end of 2017. The combination of company driver dray, owned containers and owned chassis positions our intermodal business for industry leading reliability and service.

 

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Generally, our intermodal services serve the same customer bases as our van truckload service. Customers choose intermodal when the time sensitivity of a shipment is relatively low, allowing them to take advantage of less expensive rail shipments that typically operate on a slower timeframe than truckloads. As the electronic logging device mandate and other regulatory changes put pressure on truckload capacity, intermodal will continue to be an attractive alternative. The graphic below illustrates our nationwide network of relationships with major railroads, which we believe positions our intermodal segment to take advantage of this trend of customers choosing intermodal service when the lead time of a shipment is adequate.

 

 

LOGO

Logistics Segment

Our logistics segment offers three services: brokerage, supply chain (including 3PL) and import/export. Revenue (excluding fuel surcharge) for our logistics business has grown at 16.5%, compounded annually from January 1, 2014, through December 31, 2016. Additionally, our logistics business generated approximately $147 million of intercompany freight revenue in fiscal year 2016, providing incremental growth to our portfolio of service offerings.

Our brokerage services use contracted carriers to complete customer shipments and delivers loads anywhere within the United States, Canada and Mexico. Our brokerage offering leverages relationships with over 20,000 other carriers across the truckload, less-than-truckload and intermodal segments of the transportation industry. Our brokerage business assists customers in contracting with these carriers to ship a single load or multiple loads, and also assists customers in extraordinary transportation projects using shipping transactions brokered for these customers. We generate brokerage services revenue by executing movement of freight for our customers using third-party equipment and authority. Fuel surcharge revenue is not recorded for our brokerage operation.

 

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Our supply chain services consist of a full range of single-source logistics management services and solutions, including supply chain design and optimization and coordinates suppliers for inbound transportation to customer’s supply chains. Generally, we generate supply chain services (including 3PL) revenue either based upon a flat amount per load or as consulting fees. We provide supply chain consulting and third-party logistics outsourced management for all or a portion of a customer’s supply chains. As a third-party logistics provider we leverage nearly 23,000 carriers.

Import/export services leverage 6.1 million square feet of warehouse space to provide value-added services immediately after shipments arrive in the United States, including trans-loading and warehousing, re-labeling, kitting, pick and pack assembly and inspection. A port drayage fleet of over 200 owner-operators ensures that product moves from the port to the warehouse timely and in good condition. Port business revenue is generated based upon the number of cases handled and, in some situations, the time the product is stored in company-leased warehouses.

Other

Not included in our three reportable segments is equipment leasing by SFI to third parties (primarily trucks to owner-operators) and our captive insurance business, which also provides insurance for both the company and owner-operators. It also includes limited China-based trucking operations consisting primarily of truck brokerage services.

Equipment

We operate a modern truck fleet to help attract and retain drivers, promote safe operations and reduce maintenance and repair costs. We use a level buy strategy for the tractor fleet in order to optimize total cost of ownership. The fleet is comprised of over-the-road sleeper cab tractors (approximately 85% of the fleet) and other trucks including day cab tractors (approximately 15% of the fleet). The over-the-road fleet is managed to a 5 year trade cycle, with the current average age-of-fleet of our sleeper cab tractors at approximately 2.6 years. The day-cab fleet is managed to an 8 year trade cycle and the current age-of-fleet is 4.2 years. The average age-of-fleet for the entire truck fleet is 2.9 years.

We own and lease the trucks in our company fleet. Owner-operators use their own equipment, although they may lease it from us through SFI. The table below shows the model year of our owned and leased company trucks, trailers, containers and chassis as of December 31, 2016.

 

Model Year

   Trucks      Trailers      Containers      Chassis  

2017

     1,742        5,581        —          1,401  

2016

     2,601        4,087        360        1,500  

2015

     1,968        5,062        1,139        3,096  

2014 and prior

     4,148        23,180        16,588        841  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10,459        37,910        18,087        6,838  

Owned and Leased Units

   Trucks      Trailers      Containers      Chassis(1)  

Leased Units

     224        281        —          —    

Owned Units

     10,235        37,629        18,087        6,838  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10,459        37,910        18,087        6,838  

 

 

(1) Does not include rented chassis, the number of which varies based on our capacity needs. Please refer to page 26 for a description of our chassis rental arrangement.

 

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Employees

As of December 31, 2016, we employed approximately 19,300 persons, approximately 60% of whom are drivers and 40% of whom are managers, support personnel and other corporate office employees. Approximately 14% of our associates are based in our headquarters in Brown County, Wisconsin. We have not experienced any work stoppages and consider our associate relations to be good. Currently thirteen of our company drivers are members of an organized labor union, as a result of a commitment we made in the 1980s to allow this group of drivers to finish their careers at Schneider while remaining union members. None of our other associates are represented by a labor union.

Owner-Operators

In addition to the company drivers that we employ, we enter into contracts with owner-operators. Owner-operators are small business owners who operate their own trucks (although some may employ drivers that they hire) and provide us with services under a contractual arrangement whereby they are generally responsible for the ownership and operating expenses and are generally compensated on a percentage of revenue basis. Owner-operators select their own load assignments and are in control of their schedule.

Owner-operators represented approximately 21% of all trucks in our truckload fleet as of December 31, 2016. By operating safely and productively, owner-operators can improve their own profitability and ours. Owner-operators tend to be experienced business owners that share the same incentives to be safe and productive as the company.

We offer owner-operators the opportunity to purchase trucks from us, and sometimes provide financing to owner-operators for these purchases. We offer owner-operators various operating arrangements that we believe strengthen our position as a strategic partner with these owner-operators, including self-dispatch, percentage of revenue settlement and truck financing. We believe these offerings are unique in our industry and position us as a preferred partner for owner-operators.

Safety

“Safety first and always” is a Schneider core value. We believe we have a responsibility to our associates, customers and the community to operate safely. Our safety culture is built on five key components.

 

    Driver hiring and drug testing. We complement our comprehensive driver hiring with physical testing. We voluntarily choose to use hair follicle testing in addition to urine-based drug testing. While costing more per driver, hair follicle testing is generally more accurate than the alternative.

 

    Military drivers. We have a strong relationship with the United States military, and were voted most valuable military employer in 2014 and 2015. Military experience produces quality truck drivers due to the discipline instilled through the military training programs. We currently employ approximately 2,154 former military drivers, representing 19.1% of our drivers.

 

    Training. Initial training is complemented by regularly scheduled follow-up training to sustain and enhance basic skills. We hire both experienced drivers and drivers new to the industry. We operate 17 company-sponsored driver training facilities. Additional training investments include 34 training simulators used for both initial and sustainment training.

 

    Equipment and technology We invest in trucks that are configured with roll stability capability, proprietary collision mitigation and forward facing cameras. Driving behavior is electronically monitored, alerts are provided to the driver situationally and performance is documented for subsequent coaching. We employ electronic logging, which ensures Hours of Service (HOS) compliance and reduces the instance of fatigue.

 

    Active management. Driver leaders and safety coordinators have real-time access to activity in the truck, facilitating situational and scheduled coaching. We have invested in predictive analytics that assist in proactively identifying drivers with potential safety issues and recommending a remediation path.

 

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Truckload carriers share safety performance information in monitored peer to peer forums. These comparisons show that we are one of the safest truckload carriers on the road today. We have, and have always maintained, a satisfactory DOT safety rating, which is the highest available rating.

Fuel

We actively manage our fuel purchasing network in an effort to maintain adequate fuel supplies. In 2016, we purchased 129.1 million gallons of fuel, 99% of which were through negotiated volume purchase discounts. We minimize our fuel cost by providing our drivers with location and quantity specific fueling instructions as a part of their work assignment, which is facilitated by our Quest platform. We store fuel in underground storage tanks at 11 locations and at above ground storage tanks at 13 locations. We believe that we are in substantive compliance with applicable environmental laws relating to the storage of fuel.

Shortage of fuel, increases in fuel prices or rationing of petroleum products could have a material adverse effect on our operations and profitability. In response to increases in fuel costs we use fuel surcharge programs with our customers to pass on the majority of increase in fuel costs to our customers. We believe that the most cost effective protection against fuel cost increase is to continue the fuel surcharge programs and to invest in a fuel efficient fleet. To that end, we leverage fuel consumption metrics in driver evaluation. However, fuel surcharges may not adequately cover potential future increases in fuel prices.

Regulation

Industry Regulation

Our operations are regulated and licensed by various agencies in the United States, Mexico and Canada. Our company drivers and owner-operators must comply with the safety and fitness regulations of the DOT, including those relating to drug and alcohol testing and Hours of Service (HOS). Weight and equipment dimensions are also subject to government regulations. Other agencies, such as the EPA and Department of Homeland Security, also regulate equipment. We believe regulation in the transportation industry may become progressively more restrictive and complex. The following discussion presents recently enacted federal, state and local regulations that have an impact on our operations.

Hours of Service

In December 2011, the FMCSA released its final Hours of Service (HOS) rule, which was effective on July 1, 2013. The key provisions included:

 

    retaining the current 11-hour daily driving time limit;

 

    reducing the maximum number of hours a truck driver can work within a week from 82 hours to 70 hours; and

 

    limiting the number of consecutive driving hours a truck driver can work to eight hours before requiring the driver to take a 30 minute break.

In 2013, we experienced some negative impact on our productivity as a result of the above. However, since then, we have raised our productivity levels while maintaining compliance.

Since 2004, the Hours of Service (HOS) rules allowed drivers to restart their duty-cycle clocks every 34 hours to begin a new work week. From July 2013 through December 2014, as a result of the final rule on Hours of Service (HOS), the FMCSA required that drivers include 1:00 a.m. to 5:00 a.m. on consecutive days before applying the restart, which was also capped at once per week, or 168 hours. On December 13, 2014, Congress passed the fiscal year 2015 Omnibus Appropriations bill, which temporarily suspended enforcement of the 1:00 a.m. to 5:00 am provision and the 168-hour rule until September 30, 2015. The restart provision was again suspended on December 18, 2015, when Congress passed the fiscal year 2016 Omnibus Appropriations bill. All

 

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other provisions of the Hours of Service (HOS) rules that went into effect on July 1, 2013 remained unchanged. A study on the effectiveness of the suspended restart provisions was recently completed. The FMCSA could move to reinstate these provisions or request that Congress remove the suspension. We continue to evaluate and adjust the various segments of our operations toward the ultimate impact of these changes in Hours of Service (HOS) safety requirements.

BASICs

In December 2010, the FMCSA introduced a new enforcement and compliance model that ranks both fleets and individual drivers on seven categories of safety-related data, eventually replacing the current SafeStat model. The seven categories of safety-related data, known as BASICs, currently include Unsafe Driving, Fatigued Driving (Hours of Service), Driver Fitness, Controlled Substances/Alcohol, Vehicle Maintenance, Hazardous Materials Compliance and Crash Indicator.

Certain BASICs information was initially published and made available to carriers, as well as the general public. However, in December 2015, as part of the Fixing America’s Surface Transportation (FAST) Act, Congress mandated that the FMCSA remove all CSA scores from public view until a more comprehensive study regarding the effectiveness of BASICs improving truck safety can be completed.

Implementation and effective dates are unclear, as there is currently no proposed rulemaking with respect to BASICs, leaving SafeStat the authoritative safety measurement system in effect. We currently have a satisfactory SafeStat DOT rating, which is the best available rating under the current safety rating scale.

Safety Fitness Determination

In January 2016, the FMCSA published a Notice of Proposed Rulemaking (“NPRM”) in the Federal Register, regarding carrier safety fitness determination. The NPRM proposes new methodologies that would determine when a motor carrier is not fit to operate a controlled motor vehicle. Key proposed changes included in the NPRM are as follows:

 

    There would be only one safety rating of “unfit,” as compared to the current rules, which have three safety ratings (satisfactory, conditional and unsatisfactory).

 

    Carriers could be determined “unfit” by failing two or more BASICs, investigation results or a combination of the two.

 

    Stricter standards would be used for BASICs with a higher correlation to crash risk (Unsafe Driving and Hours of Service (HOS) Compliance).

 

    All investigation results would be used, not just results from comprehensive on-site reviews.

 

    Violations of a revised list of “critical” and “acute” safety regulations would result in failing a BASIC.

 

    Carriers would be assessed monthly.

The FMCSA estimates that the proposed rule would increase the number of carriers determined to be “unfit” by more than two and a half times.

Moving Ahead for Progress in the 21st Century Bill

On July 6, 2012, Congress passed the Moving Ahead for Progress in the 21st Century bill into law. Included in the highway bill was a provision that mandates electronic logging devices in commercial motor vehicles to record Hours of Service (HOS). During 2012, the FMCSA published a Supplemental NPRM, announcing its plan to proceed with the electronic logging device and Hours of Service (HOS) supporting documents rulemaking. In December 2015, the electronic logging device rule became final, as published in the Federal Register. Although the final electronic logging device rule may have a large impact on the industry as a whole, we do not expect a

 

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significant impact on us, as we previously installed EOBRs in our operational trucks in conjunction with our efforts to improve efficiency and communications with drivers and owner-operators. Our EOBRs comply with current electronic logging device rules and we expect that by 2019, the deadline for us to comply with new electronic logging device rules, we will remain in compliance.

Prohibiting Coercion of Commercial Motor Vehicle Drivers

In November 2015, the Prohibiting Coercion of Commercial Motor Vehicle Drivers rule became final, as published in the Federal Register and adopted by the FMCSA. The rule explicitly prohibits motor carriers, among other parties in the supply chain, from coercing drivers to violate certain FMCSA regulations, including driver Hours of Service (HOS) limits, commercial drivers license regulations, drug and alcohol testing rules and hazardous materials regulations, among others. Under the new rule, drivers can report incidents of coercion to the FMCSA, who is authorized to issue penalties against the offending party.

Environmental Regulation

We are subject to various environmental laws and regulations dealing with the hauling and handling of hazardous materials, fuel storage tanks, emissions from our vehicle and facilities, engine idling, discharge and retention of storm water and other environmental matters that involve inherent environmental risk. We maintain bulk fuel storage and fuel islands at many of our terminals. We also have vehicle maintenance, repair and washing operations at some of our facilities. Our operations involve the risks of fuel spillage and seepage, discharge of contaminants, environmental damage and hazardous waste disposal, among others. We have instituted programs to monitor and control environmental risks and maintain compliance with applicable environmental laws. As part of our safety and risk management program we periodically perform environmental reviews. We are a partner in the EPA’s SmartWay Transport Partnership, a voluntary program promoting energy efficiency and air quality. We believe that our operations are in substantial compliance with current laws and regulations and do not know of any existing environmental condition that would be reasonably expected to have a material adverse effect on our business or operating results.

If we are held responsible for the cleanup of any environmental incidents caused by our operations or business, or if we are found to be in violation of applicable laws or regulations, we could be subject to liabilities, including substantial fines or penalties or civil and criminal liability. We have paid penalties for, and have incurred costs to remediate, spills and violations in the past.

In 2008 the State of California’s Air Resources Board (ARB) approved the Heavy-Duty Vehicle Greenhouse Gas (GHG) Emission Reduction Regulation in efforts to reduce GHG emissions from certain long-haul tractor-trailers that operate in California by requiring them to utilize technologies that improve fuel efficiency (regardless of where the vehicle is registered). The regulation required owners of long-haul tractors and 53-foot trailers to replace or retrofit their vehicles with aerodynamic technologies and low rolling resistance tires. The regulation also contained certain emissions and registration standards for temperature controlled trailer operators.

Thereafter, the United States EPA and the NHTSA began taking coordinated steps in support of a new generation of clean vehicles and engines through reduced GHG emissions and improved fuel efficiency at a national level. In September 2011, the United States EPA finalized federal regulations for controlling GHG emissions, beginning with model year 2014 medium- and heavy-duty engines and vehicles and increasing in stringency through model year 2018. The federal regulations relate to efficient engines, use of auxiliary power units, mass reduction, low rolling resistance tires, improved aerodynamics, improved transmissions and reduced accessory loads.

In December 2013, California’s ARB approved regulations to align its GHG emission standards and test procedures, as well as its tractor-trailer GHG regulation, with the federal Phase 1 GHG regulation, which applied fuel efficiency standards to vehicles for model years 2014 to 2018. In June 2015, the EPA and NHTSA, working

 

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in concert with California’s ARB, formally announced a proposed national program establishing Phase 2 of the GHG emissions and fuel efficiency standards for medium- and heavy-duty vehicles for model year 2018 and beyond.

In October 2016, the EPA and NHTSA formally published the Final Rule for Phase 2 of the GHG emissions and fuel efficiency standards for medium and heavy-duty engines and vehicles. The Final Rule, which became effective as of December 27, 2016, is expected by the EPA to lower CO2 emissions by 1.1 billion metric tons and reduce oil consumption by up to 2 billion barrels over the lifetime of vehicles sold under the Phase 2 program. As expected, first-time GHG and fuel efficiency standards for trailers will start in model year 2018 for EPA and model year 2021 for NHSTA, and CO2 and fuel consumption standards for combination tractors and engines (which are subject to individual and separate regulatory requirements) commence in model year 2021, increase incrementally in model year 2024 and achieve a fully phased-in requirement by model year 2027. EPA and NHSTA expect that motor carriers will meet the increased standards through the use of technology improvements in multiple areas, including the engine, transmission, driveline, aerodynamic design, extended idle reduction technologies and the use of other accessories.

Current and proposed GHG regulations could impact us by increasing the cost of new trucks, impairing productivity and increasing our operating expenses.

Federal and state lawmakers are considering a variety of climate-change proposals related to carbon emissions and GHG emissions. The proposals could potentially limit carbon emissions for certain states and municipalities, which continue to restrict the location and amount of time that diesel-powered trucks (like ours) may idle.

Other Regulation

In the aftermath of the September 11, 2001 terrorist attacks, federal, state and municipal authorities implemented and continue to implement various security measures on large trucks, including checkpoints and travel restrictions. The TSA adopted regulations that require drivers applying for or renewing a license for carrying hazardous materials to obtain a TSA determination that they are not a security threat.

In December 2014, United States President, Barack Obama, signed the Tax Increase Prevention Act of 2014 (TIPA). Among other things, TIPA extended 50% bonus depreciation and the Work Opportunity Tax Credit (WOTC). In December 2015, President Obama signed the Protecting Americans from Tax Hikes (PATH) Act of 2015.

Sales and Marketing

We sell combinations of transportation services directly to nearly 200 Fortune 500 companies. We leverage a key account program providing each key account with a Global Account General Manager as the lead commercial interface (33 key accounts account for 40% of enterprise revenue).

Each service offering is represented by independent field sales representatives. We have approximately 160 field representatives located throughout North America. There are three distinct field representative roles, which respectively focus on: (1) generating new business with large shippers; (2) maintaining and growing relationships with existing customers; and (3) developing new business with the small to medium sized shipper. These roles are measured, trained and incentivized uniquely.

While our field representatives are service offering experts they are also trained and incented to cross-sell other services in which they do not have expertise. Twenty-two of our top twenty-five customers utilize services from all three reportable segments. We supplement the field representatives with approximately 175 inside sales representatives who focus primarily on new prospects (the bulk of these are in our brokerage business).

 

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Large shippers generally anchor transportation buying in annual purchasing events. Over half of the freight we move is initially secured through a procurement event. Our outside and inside sellers are supported by customer service representatives who interact with our customers daily booking and executing orders. Unexpected exceptions are a staple of supply chains. Our customer service representatives’ ability to adroitly problem-solve and increase the level of sales to our existing customers, based on their knowledge of the business of our existing customers, is a key component of our commercial approach.

Technology and Research and Development

We are a technology leader in the truckload industry. We are pioneers in in-cab communications and were the first to install on-board satellite communications, untethering our drivers from landline telephones. We have built on that core in-cab capability over the past 30 years. Today our in-cab telematics platform in the truck delivers customer location specific step-by-step work assignments to our driver fleet. Work assignments include routing (with in-cab navigation) and fueling direction. Our trailer and container fleets are equipped with monitoring devices which function both when tethered to a tractor and standing alone. Our tractors are equipped with stability and collision avoidance technology. All tractor technology interfaces with the in-cab device and provides the driver and the driver leader with real-time performance data.

We execute our business on Quest, an integrated technology platform using technology from our strategic development partner, Oracle Corporation, reflecting an end-to-end process design with focus on information accessibility and insight across our value chain. Quest enables an integrated approach to cash process including load/order acceptance, based on driver and network optimization, vehicle dispatch, continuous quote monitoring and visibility to the load from pick up to delivery and finally customer billing. Our technology is enhanced by the work of a team of operations research engineers and data scientists. Proprietary decision support tools are embedded throughout the Quest platform. Decision support tools improve our ability to, among other things, situationally coach drivers, minimize fuel costs and maintain the fleet in the most cost effective manner. The most significant application of such “decision science” technology is in planning and dispatch. These tools assist our associates in making the right trades-offs among drivers’ needs for earnings and work-life balance, customers’ needs for reliable capacity and service, and our business and its shareholders’ needs for an adequate return.

We continue to expand business capabilities by extending the foundational Quest platform. Development of the next generation of in-cab technology is well underway. We are also leveraging mobile applications to better connect with drivers and customers. One recent example is a mobile application that prompts our drivers to rate the shipping, receiving and driver support locations that they visit. Our gathering and sharing of this information with customers and providers has been well received and is driving action to improve the driver’s experience.

Properties

We own or lease over two hundred properties across thirty-six states, Canada and Mexico. Our expansive network includes nearly 50 operating centers, approximately 40 distribution warehouses, 14 offices and over 100 drop yards. In addition, we physically operate at a number of customer locations.

 

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The operating centers we own or lease throughout the United States offer on-site management to support our transportation network for our truckload and intermodal segments. Often, our facilities include customer service centers, where our customers may contact a company representative to discuss their loads/orders, fuel and maintenance stations, and other amenities to support our drivers. Our facility network also includes warehouse capacity to further enhance our supply chain solutions. The following table provides a list of 32 properties that are central to our transportation network and indicates the functional capability at each site.

 

          Facility Capabilities

Location

  

Function

   Customer
Service
   Operations    Fuel    Maintenance

Charlotte, NC

   Truckload            

Gary, IN

   Truckload            

Indianapolis, IN

   Truckload            

West Memphis, AR

   Truckload            

Puslinch/Guelph, ON

   Truckload            

Houston, TX

   Truckload            

Dallas, TX

   Truckload            

Carlisle/Harrisburg, PA

   Truckload            

Green Bay, WI (three facilities)

   Corporate            

Santa Fe / Mexico City, Mexico

   Mexico            

Chicago, IL

   Logistics            

Dallas, TX

   Logistics            

Farmington Hills, MI

   Logistics            

Green Bay, WI

   Truckload            

Atlanta, GA

   Truckload            

Eastvale, CA

   Truckload            

Edwardsville, IL

   Truckload            

Portland, OR

   Truckload            

Des Moines, IA

   Truckload            

Chicago, IL

   Intermodal            

Elwood, IL

   Logistics            

Laredo, TX

   Truckload            

Houston, TX

   Truckload            

Reserve, LA

   Truckload            

San Bernardino, CA

   Intermodal            

Phoenix, AZ

   Truckload            

Port Wentworth, GA

   Logistics            

Zeeland, MI

   Truckload            

Helena, MT

   Truckload            

Missoula, MT

   Truckload            

Legal Proceedings

In November 2016, we received a Finding and Notice of Violation from the EPA alleging that, among other matters, 150 of the vehicles we own, hire or lease failed to comply with certain provisions of the California Air Resources Board Truck and Bus Regulation, in violation of the Clean Air Act.

We are not currently a party to any material litigation proceedings. From time to time, however, we may be a party to litigation and subject to claims incident to the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding our executive officers, directors and significant employees at the time of effectiveness of this registration statement:

 

Name

  

Age

  

Position

Christopher B. Lofgren

   58   

Chief Executive Officer, President and Director

Mark Rourke

   52   

Chief Operating Officer and Executive Vice President

Lori Lutey

   52   

Chief Financial Officer and Executive Vice President

Shaleen Devgun

   44   

Chief Information Officer and Executive Vice President

Steve Matheys

   58   

Chief Administrative Officer and Executive Vice President

Paul Kardish

   54   

General Counsel, Secretary and Executive Vice President

Thomas Gannon

   63   

Director

Adam Godfrey

   54   

Director

Robert Grubbs

   59   

Director

Norman Johnson

   68   

Director

Therese Koller

   57   

Director

Daniel Sullivan

   70   

Chairman of our Board of Directors

R. Scott Trumbull

   68   

Director

Kathleen Zimmermann

   50   

Director

Christopher B. Lofgren has served as our Chief Executive Officer and President, and as a director, since August 2002. He joined Schneider Logistics in 1994 as vice president of engineering and systems. He later served as Chief Information Officer and Chief Operating Officer before being named President and Chief Executive Officer of Schneider in 2002. Dr. Lofgren currently serves on the Board of Directors of CA Technologies and the U.S. Chamber of Commerce. Locally, he is a member of the Senior Advisory Council for Junior Achievement of Brown County (Wisconsin). Before joining the company, Dr. Lofgren held positions at Symantec Corporation, Motorola and CAPS Logistics. He holds a bachelor’s degree and a master’s degree in industrial and management engineering from Montana State University and a doctorate in industrial and systems engineering from The Georgia Institute of Technology. In October 2009, Dr. Lofgren was inducted into the National Academy of Engineering. We believe that Dr. Lofgren is qualified to serve on our Board of Directors because of his extensive knowledge and experience in all aspects of our business, and his extensive technical expertise in all aspects of our truckload, intermodal and logistics services.

Mark Rourke has served as our Chief Operating Officer and Executive Vice President since September 2015. He previously served as our President of our Truckload Services Division and was also previously General Manager of Schneider Transportation Management, where he was responsible for the effective delivery to market of sole source, promotional and brokerage service offerings. Before that, he held a variety of leadership roles with increasing responsibility at our company, including Vice President of Customer Service, Director of Transportation Planning for Customer Service, Midwest Area Service Manager for Customer Service and Director of Driver Training. Mr. Rourke joined our company in 1987 as a service team leader in the company’s Seville, Ohio, location. His earlier roles with the company included on-site account manager for B.F. Goodrich in Cleveland, Ohio, Dedicated team operations manager and van support manager. He holds a bachelor’s degree in marketing from the University of Akron, Ohio. He also serves on the Board of Directors for New North Inc.

 

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Lori Lutey has served as our Chief Financial Officer and Executive Vice President since April 2011. Prior to joining our company in 2011, Ms. Lutey was Vice President of Finance at FedEx Services, where she was responsible for financial planning and analysis for over $1 billion in annual expense and led all strategic and tactical financial support. Ms. Lutey started her 22-year career with FedEx Corporation and advanced steadily after starting as a financial analyst, including serving as Vice President at FedEx Supply Chain Services and as Vice President and CFO of FedEx Trade Networks. She holds a bachelor’s degree in management information systems from Tennessee Tech University and a master’s degree in business administration from the University of Memphis. She also serves on the Board of Directors for LIVE54218, a non-profit focused on obesity prevention.

Shaleen Devgun has served as our Chief Information Officer and Executive Vice President since July 2015. Mr. Devgun previously served as Vice President for Strategy, Planning and Solution Delivery. Prior to joining our company in 2009, Mr. Devgun spent twelve years in management consulting roles with DiamondCluster International and Deloitte, specializing in corporate venturing, formulation and execution of business and technology strategy, program leadership and operational design. He holds bachelor’s degrees in economics and math from the University of Pune and a master’s degree in business administration from the University of Detroit Mercy. He also serves on the Board of Directors for the Fox Cities Performing Arts Center.

Steve Matheys has served as our Chief Administrative Officer and Executive Vice President since October 2009. Mr. Matheys joined our company in 1994 and held progressive leadership roles in the Information Technology department before being promoted to Executive Vice President and Chief Information Officer in 2001. Subsequently, he was promoted to Executive Vice President, Sales and Marketing in 2004, added customer service to his responsibilities in 2006, and then refocused his accountability on our largest customers in 2008 prior to moving into his current role in 2009. In addition to his leadership roles at the company, Mr. Matheys spent the first thirteen years of his career with Nielson Marketing Research, The Trane Company and General Motors in a variety of information technology roles. He holds a bachelor’s degree in business administration from the University of Wisconsin-La Crosse, with a minor in computer science, and actively serves on the Brown County United Way Board of Directors, of which he was previously chair, and the Wharton Research Advisory Group (RAG) for Human Resources.

Paul Kardish has served as our General Counsel, Secretary and Executive Vice President since August 2013. At the time Mr. Kardish joined our company, he had more than 20 years of broad ranging corporate legal, human resource, corporate governance/compliance, security and government relations experience. His career includes work at several Fortune 250 companies spanning multiple industries, including Honeywell, Intel, Micron and Freeport McMoRan. He holds a bachelor’s degree in social work/psychology from Juniata College, a juris doctor from Gonzaga University School of Law and a master of laws degree from New York University School of Law. He was admitted to the Texas Bar in 1993 and to the Wisconsin Bar in 2013. Mr. Kardish also served as a Special Agent with the Federal Bureau of Investigation and is trained in emergency management. Mr. Kardish is a member of the Texas and Wisconsin and American Bar Associations and the Phi Delta Phi Legal Honor Fraternity. He also serves as a member of the Board of Directors for the American Red Cross—Northeastern Wisconsin.

Thomas Gannon has served as a director since 2005, and has served as chairman of the corporate governance committee and as a member of the audit and compensation committees of the Board during his tenure. Mr. Gannon joined our company in 1982. Since 1984, we have employed Mr. Gannon as a financial, tax and philanthropic adviser to multiple generations and family branches of the Schneider family and related trusts, and Mr. Gannon been principally responsible for maintaining ownership control by the Schneider family through generational shifts. He is also responsible for all matters relating to the company’s shareholders and transactions in Company stock. Mr. Gannon has indicated to the company that he intends to resign from this employment at the time of this offering. Mr. Gannon also served as the chief financial officer of the company from 1989 until 2005, and the Secretary of the company from 1991 until 2015. Mr. Gannon has also served as a director of the Little Rapids Corporation, where he was chairman of the audit and compensation committees, from 2001 until 2015, and as a director of Aearo Technologies, Inc. from 2006 until 2008, where he served as chairman of the

 

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audit committee. He holds an Economics degree from Marquette University and a law degree from the University of Wisconsin. We believe that Mr. Gannon is qualified to serve on our Board of Directors because of his deep knowledge of Schneider, its history and its corporate values, in addition to his business and leadership experience.

Adam Godfrey has served as a director since 2005. Mr. Godfrey is a Managing Partner of Stella Point Capital, which he co-founded in 2012. Stella Point Capital is a New York-based private equity firm focused on industrial, consumer and business services investments. Mr. Godfrey is an investment professional and has sourced and managed numerous investments for Stella Point Capital. Previously, Mr. Godfrey spent nearly 19 years with Lindsay Goldberg and its predecessor entities, which he joined in 1992. Currently, he serves on the Board of Directors of First American Payment Systems Holdings, Inc., Rightpoint Consulting LLC and Intermex Holdings, Inc. Mr. Godfrey holds a bachelor’s degree from Brown University and a master’s degree in business administration from the Tuck School of Business at Dartmouth. We believe that Mr. Godfrey is qualified to serve on our Board of Directors because of his extensive experience in finance, investing and corporate strategy during his time at Stella Point Capital and Lindsay Goldberg and his prior experience serving on the Boards of Directors of several portfolio companies in which Stella Point Capital and Lindsay Goldberg invested.

Robert Grubbs has served as a director since 2012. Mr. Grubbs serves as the Non-Executive Chairman of Ohio Transmission Corp., a distributor of motion control and related products and services. He also serves as Non-executive Chairman of Grand Northern Products (GNAP, LLC), a distributor of industrial abrasive products, equipment, specialty ceramics and ancillary services used in the applications of investment casting, metal stamping, machining, forging, remediation, coating and paving. Ohio Transmission Corp. and Grand Northern Products have previously received financing from Frontenac Company, LLC, a private equity firm based in Chicago that focuses on investing in lower middle market buyout transactions in the food, industrial and services industries. From 1998 to 2008, Mr. Grubbs served as the President and Chief Executive Officer of Anixter International Inc., a Chicago-based distributor of network and security solutions, electrical and electronic solutions and utility power solutions. From 1994 to 2008 Mr. Grubbs was also the President and Chief Executive Officer of Anixter Inc., a subsidiary of Anixter International Inc. He also serves as a director of Anixter International Inc. Mr. Grubbs holds a bachelor’s degree in business administration from the University of Missouri. We believe Mr. Grubbs is qualified to serve on our Board of Directors because of his extensive executive, leadership and director experience, his experience as an executive and director of a publicly traded company and because of his expertise in the area of supply chain services (including 3PL).

Norman Johnson has served as a director since 2006. Since August 2012, Mr. Johnson has served on the Board of Directors of Cracker Barrel Old Country Store, Inc., an operator of stores and restaurants. From March 2000 to July 2010, Mr. Johnson served as President, Chairman and Chief Executive Officer of CLARCOR Inc., a diverse filtration company. From July 2010 to December 2011, Mr. Johnson was the Chairman and Chief Executive Officer of CLARCOR, and he later served as the Executive Chairman of CLARCOR from December 2011 until his retirement in November 2012. In addition, Mr. Johnson served from July 2012 until October 2016 on the Board of Directors of CIRCOR International, Inc., a manufacturer of valves and other highly engineered products and sub-systems used in the energy, aerospace and industrial markets. Mr. Johnson holds a bachelor’s degree in business administration from the University of Iowa and a master’s degree in business administration from Drake University. We believe Mr. Johnson is qualified to serve on our Board of Directors because of his extensive executive, leadership and director experience, his experience as an executive and director of publicly traded companies and because of his deep knowledge of integration and distribution networks.

Therese Koller has served as a director following her appointment for the 2016 annual term. Ms. Koller engages in philanthropic work and serves on the board of a variety of non-profit organizations. She holds a bachelor’s degree from the University of St. Thomas and a master’s degree from the University of Pennsylvania. Ms. Koller is the sister of director Kathleen Zimmermann. We believe that Ms. Koller is qualified to serve on our Board of Directors due to her deep knowledge of Schneider, its history and its corporate values, in addition to her business and leadership experience.

 

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Daniel Sullivan has served as a director since 2009 and as Chairman of our Board of Directors since 2014. Mr. Sullivan is a Principal of Flyway, LLC, a private investment company. He most recently served as the President and Chief Executive Officer of FedEx Ground from 1998 until 2007. FedEx Ground is a wholly owned subsidiary of FedEx Corporation. From 1996 to 1998, Mr. Sullivan was the Chairman, President and Chief Executive Officer of Caliber System. In 1995, Mr. Sullivan was the Chairman, President and Chief Executive Officer of Roadway Services. Mr. Sullivan has served as the Chairman of the Board of Directors of Computer Task Group, an IT solutions and staffing services company, since October 2014, and as a member of the Computer Task Group Board of Directors since 2002. He is also a current member of the Board of Directors of The Medical University of South Carolina Foundation where he serves as Vice Chairman of the Board of Directors. Mr. Sullivan previously served as a member of the Board of Directors of Pike Electric, Inc. from 2007 to 2014 (Pike Electric was sold in December 2014 to Court Square Capital Partners), GDS Express (Akron, Ohio) from 2004 to 2009 and Gevity, Inc. (Bradenton, Florida) from 2008 to 2009. He is a former federal commissioner for the Flight 93 National Memorial project in Somerset County, Pennsylvania. Mr. Sullivan holds a bachelor’s degree from Amherst College. We believe that Mr. Sullivan is qualified to serve on our Board of Directors because of his extensive leadership and executive experience, his experience has a director of publicly traded companies and because of his operational experience with companies having large and diverse employee workforces across geographic markets.

R. Scott Trumbull has served as a director since 2002. Since January 2014, Mr. Trumbull has served on the Board of Directors of Columbus McKinnon Corporate, a global designer, manufacturer and marketer of material handling products for commercial and industrial end-user markets. Since 1999, Mr. Trumbull has served on the Board of Directors of Welltower Inc., a company that invests with seniors housing operators, post-acute providers and health systems to fund real estate and infrastructure. He also serves as a director of Artisan Partners Funds, Inc., a registered mutual fund, and is a member of the Board of Trustees of ProMedica, a healthcare system with facilities throughout Northwest Ohio and Southeast Michigan. From 2003 until May 2014, he was the Chief Executive Officer of Franklin Electric Co., Inc., a company that designs, manufactures and distributes water and fuel pumping systems. Mr. Trumbull also served as Chairman of the Board of Franklin Electric Co., Inc. from 2003 until May 2015. Prior to his service with Franklin Electric Co., Inc., Mr. Trumbull was Executive Vice President and Chief Financial Officer of Owens-Illinois, Inc., a global manufacturer of glass and plastic packaging products, from 2001 to 2002, and prior thereto, he was Executive Vice President of International Operations & Corporate Development of Owens-Illinois, Inc., from 1993 to 2001. He began his career at Owens-Illinois, Inc. in 1972. Mr. Trumbull holds a bachelor’s degree in economics from Denison University and a master’s degree in business administration from Harvard Business School. We believe that Mr. Trumbull is qualified to serve on our Board of Directors because of his extensive leadership and executive experience, his experience has a director of publicly traded companies and because of his global perspective attained through many years of chief executive experience.

Kathleen Zimmermann has served as a director since her appointment for the 2017 annual term. Ms. Zimmermann is currently a real estate investor and holds her real estate license. She received her bachelor’s degree in marketing from Marquette University. Ms. Zimmerman is the sister of director Therese Koller. Ms. Zimmermann has held a variety of sales leadership roles throughout her career including with Schneider Communications, Frontier Communications and Global Crossing. We believe that Ms. Zimmermann is qualified to serve on our Board of Directors due to her deep knowledge of Schneider, its history and its corporate values, in addition to her business and leadership experience.

Controlled Company Status

Upon completion of this offering, the Schneider National, Inc. Voting Trust will hold a majority of the voting power of our outstanding common stock. Accordingly, we expect to be considered a “controlled company” under the NYSE listing rules. As a controlled company, certain exemptions under the NYSE listing standards will exempt us from the obligation to have a corporate governance committee that is composed entirely of independent directors. We intend to use this exemption following the completion of this offering. We do not intend to use any other controlled company exemption.

 

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Board Structure

Upon completion of the offering, our Board of Directors will consist of nine members. Our Board of Directors has determined that each of Adam Godfrey, Robert Grubbs, Norman Johnson, Daniel Sullivan and R. Scott Trumbull is independent under applicable NYSE rules.

In accordance with our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws effective upon the completion of the offering, each of our directors will serve for a one-year term or until his or her successor is elected and qualified. Each of our directors and director-nominees must satisfy certain conditions specified in our Amended and Restated Bylaws, including that such individual cannot be 74 years or older, cannot be a material customer or supplier, cannot be an officer of any entity of which any other of our directors is a director and must have his or her nomination approved by the unanimous vote of our full Board of Directors if such individual has served on our Board of Directors for more than 14 consecutive fiscal years. At each annual meeting of our shareholders, our shareholders will elect the members of our Board of Directors. There will be no limit on the number of terms a director may serve on our Board of Directors.

Pursuant to the Schneider Family Board Nomination Process Agreement, five specified members of the Schneider family shall have the right to nominate, and the company shall include in the slate of nominees recommended to shareholders of the company for election as a director at any meeting of shareholders at which directors are to be elected, two family members to serve on our Board of Directors on an annual, rotating basis. Each Schneider family member nominated in accordance with such agreement must satisfy the qualifications for service as a director set forth in the Amended and Restated Bylaws or such qualifications must be waived in accordance with such Amended and Restated Bylaws. The directorships will rotate among the five Schneider family members through 2025, with each director anticipated to serve for three consecutive years, plus the remainder of any current rotation at the time of the consummation of this offering. After the rotation system described above is complete, the five specified Schneider family members may, if they have at least 80% of such family members in agreement, propose to the corporate governance committee an amendment to the agreement, consistent with such agreement, to cover nominations in subsequent periods, the approval of which shall not be unreasonably withheld by either the corporate governance committee or the Board of Directors.

Board Committees

Upon completion of the offering, our Board of Directors will have the following committees, each of which will operate under a written charter that will be posted on our website prior to the completion of this offering. The initial members of each committee will be determined prior to the effectiveness of the registration statement of which this prospectus is a part.

Audit Committee

Our audit committee consists of and will as of the consummation of our initial public offering continue to consist of Adam Godfrey, as chair, Daniel Sullivan and R. Scott Trumbull. The audit committee will assist the board in overseeing our accounting and financial reporting processes and the audits of our financial statements. In addition, the audit committee will be establishing the scope of the company’s annual audit, review the report and comments of the company’s independent registered public accounting firm, be directly responsible for the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm and will perform any other activities delegated to the committee by the Board of Directors.

Compensation Committee

Our compensation committee consists of and will as of the consummation of our initial public offering continue to consist of Robert Grubbs, as chair, Norman Johnson and Daniel Sullivan. The compensation committee is responsible for assisting our Board of Directors in discharging its responsibilities relating to establishing and reviewing the compensation of our officers and approving, overseeing and monitoring incentive and other benefit plans for our employees and performing any other activities delegated to the committee by the Board of Directors.

 

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Corporate Governance Committee

Effective upon the consummation of our initial public offering, our corporate governance committee will consist of Norman Johnson, as chair, Thomas Gannon, Adam Godfrey, Robert Grubbs, Daniel Sullivan, R. Scott Trumbull, Therese Koller and Kathleen Zimmermann. The corporate governance committee assists our Board of Directors in identifying individuals qualified to become members of our Board of Directors consistent with criteria established by our board and in developing our corporate governance principles. This committee’s responsibilities include selecting individuals to be proposed for nomination as directors of the company, nominating individuals for election as directors of the company, establishing and nominating directors for appointment to committees of the Board of Directors, reviewing the performance and qualifications of directors, reviewing and recommending policies to the Board of Directors and establishing and reviewing compensation for the Board of Directors and performing any other activities delegated to the committee by the Board of Directors.

Our Amended and Restated Bylaws provide that those members of our corporate governance committee who are not members of the Schneider family shall serve as trustees of the Voting Trust in accordance with the terms of the Voting Trust. Our Amended and Restated Bylaws also provide that the chairman of our corporate governance committee shall be an individual who is not a member of the Schneider family, and that our corporate governance committee shall at all times be comprised of each director that is a member of the Schneider family and up to six directors who are not members of the Schneider family.

Code of Ethics

Our code of business conduct and ethics applies to all of our directors, officers and other employees, including our principal executive officer, principal financial officer and principal accounting officer. Any waiver of the code for directors or executive officers may be made only by our Board of Directors and will be promptly disclosed to our shareholders through publication on our website, https://schneider.com. Amendments to the code must be approved by our Board of Directors and will be promptly disclosed (other than technical, administrative or non-substantive changes). A copy of our code of business conduct and ethics will be posted on our website in connection with this offering.

Corporate Governance Guidelines

Our Board of Directors has adopted corporate governance guidelines that serve as a flexible framework within which our Board of Directors and its committees operate. These guidelines will cover a number of areas, including the size and composition of the board, board membership criteria and director qualifications, director responsibilities, board agenda, roles of the Chairman of the Board, Chief Executive Officer and presiding director, meetings of independent directors, committee responsibilities and assignments, board member access to management and independent advisors, director communications with third parties, director compensation, director orientation and continuing education, evaluation of senior management and management succession planning. Additionally, our Board of Directors will adopt independence standards as part of our corporate governance guidelines. A copy of our corporate governance guidelines will be posted on our website, https://schneider.com, in connection with this offering.

Compensation Committee Interlocks and Insider Participation

None of our executive officers has served as a member of a compensation committee of any other entity that has an executive officer serving as a member of our Board of Directors.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Introduction

This Compensation Discussion and Analysis (“CD&A”) describes our process for determining the compensation and benefits provided to our “named executive officers” in fiscal year 2016. We also provide an overview of the compensation philosophies we expect to adopt following the closing of this offering.

Our named executive officers for fiscal year 2016 are all members of our senior executive management team:

 

    Christopher B. Lofgren—President and Chief Executive Officer

 

    Lori Lutey—Executive Vice President, Chief Financial Officer

 

    Mark Rourke—Executive Vice President, Chief Operating Officer

 

    Steve Matheys—Executive Vice President, Chief Administrative Officer

 

    Paul Kardish—Executive Vice President, General Counsel

We expect that our named executive officers will hold the same positions with the company following the closing of this offering.

Compensation Philosophy and Principles

Retention of executive talent is critical to our success. Our compensation committee believes that the ability to attract, retain and provide appropriate incentives to our leadership, including the named executive officers, is essential to maintain our leading competitive position and promote our long-term success. Accordingly, our executive compensation program is designed to encourage retention, particularly of executives who assume a broad span of responsibilities and successfully lead complex business units to market-leading positions in the industry.

The transportation industry is highly competitive, and we compete for executive talent with a large number of companies across various geographies, including companies with significant market capitalizations. Our compensation committee’s goal is to maintain compensation programs that are competitive both within the transportation industry and with similarly situated companies from the broader general industry. Each year, our compensation committee reviews the executive compensation program with respect to (i) external competitiveness and (ii) linkage between executive compensation and the creation of shareholder value, and determines what changes, if any, are appropriate.

The overall compensation philosophy of our compensation committee and management is guided by the following principles:

 

    Target compensation levels should be sufficiently competitive to attract and retain key talent. We aim to attract, motivate and retain high-performance talent to achieve and maintain a leading position in our industry. Our target total direct compensation (“TDC”) levels should be competitive with other transportation and general industry alternatives.

 

    Actual compensation should relate directly to performance and responsibility. Actual compensation levels should be tied to and vary with performance, both at the company and individual level, in achieving financial, operational and strategic objectives. Differentiated pay for high performers should be proportional to their contributions to our success.

 

    Incentive compensation should constitute a significant portion of target total direct compensation. A large portion of each executive’s compensation opportunity should be tied to performance, and therefore at risk, as position and responsibility increase. Individuals with greater roles and the ability to directly impact strategic direction and long-term results should bear a greater proportion of the risk.

 

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    Long-term incentive compensation should be closely aligned with shareholders’ interests. Awards of long-term compensation provide incentives to our named executive officers to focus on the company’s long-range growth and development. Moreover, providing our named executives with a meaningful equity stake in the company (including through our stock purchase policy) helps to align management interests with those of our shareholders, and encourages long-term career orientation. See “—Stock Purchase Policy.”

The company’s executive compensation program is designed to reward the achievement of initiatives regarding growth, productivity and people, including:

 

    setting, implementing and communicating strategies, goals and objectives to ensure that the company grows revenues and earnings at attractive rates over the long-term;

 

    motivating and exhibiting leadership that aligns the interests of the employees with those of the shareholders;

 

    developing a grasp of the competitive environment and taking steps to position the company for growth and as a competitive force in the industry;

 

    constantly renewing the company’s business model and seeking strategic opportunities that benefit the company and its shareholders; and

 

    implementing a discipline of compliance and focusing on the highest standards of professional conduct and corporate governance.

Process of Setting Compensation

Market Assessment against Peer Group

In 2015, our compensation committee engaged Frederic W. Cook & Co., Inc. (“FW Cook”) to perform a competitive market assessment for our named executive officers, including with respect to base salary, annual incentive targets, target cash compensation, long-term incentives and target TDC level (the sum of base salary, target bonus and long-term incentive grant value).

The assessment involved a peer group consisting of companies in related industries with revenues generally ranging from one-third to 3.5 times those of the company and whose median revenue was similar to that of the company. The resulting group consisted of the following 15 transportation and logistics companies with median revenues of $3.929 billion compared to the company’s $3.970 billion.

 

Arc Best Corp.

   JB Hunt Transport Services, Inc.    SAIA, Inc.

C.H. Robinson Worldwide

   Landstar System, Inc.    Swift Transportation Company

Con-Way, Inc.

   Old Dominion Freight Line, Inc.    UTI Worldwide, Inc.

Expeditors Int’l of Washington, Inc.

   Roadrunner Transportation    Werner Enterprises, Inc.

Hub Group, Inc.

   Ryder System, Inc.    YRC Worldwide

The above peer group data were supplemented with general industry data from two national surveys to provide additional reference points, with data size-adjusted based on the revenue responsibility of each named executive officer and to reflect lower margins and market cap-to-revenue ratios among transportation companies relative to general industry companies. In reviewing target TDC levels against the survey data, our compensation committee considers only the aggregated survey data provided by the surveys. The identity of the individual companies comprising the survey data is not disclosed to, or considered by, our compensation committee in its evaluation process. Therefore, our compensation committee does not consider the identity of the companies comprising the survey data to be material for this purpose.

 

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Our compensation committee believes it is appropriate to consider both peer group data and general industry data in order to remain competitive within the transportation industry as well as with respect to other industries where skills may be easily transferable. Our compensation committee considers target TDC levels around the 50th percentile of each of the peer group data and survey data as a useful reference in determining the competitiveness of our named executive officers’ target TDC levels. Our compensation committee does not target specific positioning, nor does it use a formulaic approach in determining competitive pay levels. Instead, our compensation committee uses a range of data as a reference, which is considered in the context of various executive-specific factors, such as tenure, proficiency in role and criticality to the company.

Determining Executive Pay

Our compensation committee reviews and approves our Chief Executive Officer’s target TDC level annually. Our compensation committee also approves target TDC levels for the other named executive officers, taking into account our Chief Executive Officer’s recommendations. This review process occurs in the fall of each year to coincide with our fourth quarter Board of Directors meeting. Historically, compensation actions, including annual long-term incentive grants, have been made in January, after the previous year’s performance results have been finalized and certified by our compensation committee. Compensation increases and equity award grants are not usually made at other times of the year, except in cases of new hires or promotions.

Key Compensation Policies and Programs

Pay for Performance

We believe that a sizeable portion of overall target TDC should be at risk and tied to shareholder value. Our compensation committee takes into account our performance in its process for determining executive compensation, and designs incentive programs to encourage our growth. Our compensation committee and management believe that the proportion of compensation at risk should rise as the employee’s level of responsibility increases.

For example, our annual cash bonuses in recent years have been tied to company-wide performance measures, such as earnings before interest and tax (“EBIT”) and revenue growth. As each performance measure improves, so do executive bonuses. We also use long-term incentives as tools to reward executives for future financial and stock price performance.

Long-Term Compensation

With respect to long-term incentive compensation awards, the company maintains the following long-term incentive plans:

 

    The Schneider National, Inc. Omnibus Long-Term Incentive Plan (which we refer to as the “LTIP”), under which equity and cash awards may be granted to eligible employees and directors, including our named executive officers. Our Board of Directors originally adopted and approved the LTIP on February 7, 2011, and approved an amended and restated LTIP on November 8, 2011 and December 31, 2012.

 

    The 2005 Schneider National, Inc. Long-Term Incentive Plan (which we refer to as the “2005 LTIP”), under which awards of Retention Credits (described below) have been granted, including to certain of our named executive officers. Our Board of Directors adopted and approved the 2005 LTIP effective January 1, 2005.

Recently, we have granted restricted share and performance-based long-term cash awards under the LTIP. These awards are intended to attract and retain employees and directors, to provide incentives to enhance job performance and to enable those persons to participate in the long-term success and growth of the company through an equity or equity-like interest in the company. The number of restricted shares that may be awarded to

 

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an individual, or the size of any cash award, is within the discretion of our compensation committee and is generally based on the company’s performance and the individual’s current level of compensation, individual performance, potential for promotion and marketability outside the company. The size of an individual’s previous LTIP awards may be, but is not always, a consideration in determining the amount of awards granted to that individual in the future. Restricted shares are intended to provide approximately 30% of the grant date value of an individual’s long-term incentive grant while the performance-based long-term cash award is intended to account for the other 70% (assuming target performance).

Restricted Shares. Our restricted share awards vest over time, typically over three years, based on continued employment with us through each vesting date, with limited exceptions for a termination of employment due to death or disability, an eligible retirement or a change in control. We began granting restricted shares under the LTIP in 2011. Recipients of restricted shares realize value as restricted shares vest, with such value increasing as our book value increases. Cash dividends are not paid on unvested restricted shares, nor do they accumulate during the vesting period.

Long-Term Cash Awards. Our long-term cash awards, which we have granted annually since 2013, are performance-based in an effort to link future compensation to the long-term financial success of the company. Payout is contingent on the company’s attainment of two pre-established performance metrics, measured over a five-year period: compounded net income growth (determined on the basis of GAAP) and return on capital (which we refer to as “ROC”). These performance metrics were selected because they represent the key drivers of value creation in the transportation industry. While each grant is expressed as a fixed dollar amount, the actual amount earned may range from 0% of target to 250% of target for superior performance. The award cliff-vests after the end of the five-year performance period, subject to continued employment with us and compliance with the terms of certain restrictive covenants. Vested awards will be paid out 90 days following completion of the five-year performance period, or on a subsequent deferral date elected by the executive pursuant to our 2005 Supplemental Savings Plan. See “—Nonqualified Deferred Compensation for Fiscal Year 2016—Supplemental Savings Plan.” The awards are also subject to continued compliance with the terms of certain restrictive covenants. Individuals who terminate employment due to death, disability, an eligible retirement or a change in control during the performance period will receive a pro rata portion of the cash award.

Retention Credits. Our compensation committee occasionally grants mandatorily deferred time-based cash “Retention Credits,” which typically vest in 20% increments over a five-year period based on continued employment. Vested Retention Credits are paid out in March following the second anniversary of the date of the employee’s termination of employment, provided the employee has not violated the terms of their restrictive covenant agreements. These awards are intended to enhance the retentive aspects of executive compensation, to provide deferred compensation, and to incentivize compliance with post-employment restrictive covenants.

Stock Appreciation Rights. Stock Appreciation Rights, or “SARs,” is a legacy program. In 2011 and 2012, our compensation committee granted SARs which become 100% vested on the date provided in the applicable award agreement (generally a three-year vesting period). The account balance for 2011 and 2012 awards are included in the “Aggregate Balance at Last Fiscal Year End” column of the Nonqualified Deferred Compensation Table for Fiscal Year 2016. See “—Nonqualified Deferred Compensation For Fiscal Year 2016.” Vested SARs will be paid out on March 1 of the fifth year following the year of such grant (or as soon as practicable thereafter, but in no event later than June 1) or on a subsequent deferral date elected by the executive (or within 90 days following a termination of employment or change in control, if earlier), and until payment, continue to appreciate (or depreciate) as if notionally invested in our Class B common stock. No payments in respect of SARs were made to our named executive officers in 2016 because each of them elected to defer. The value of the SARs upon payment will equal the excess, if any, of the fair market value of a share of our Class B common stock on the date of payment over the grant price set forth in the applicable award agreement, multiplied by the number of vested SARs. Grants of SARs were intended to enhance the retentive aspects of executive compensation, and to tie executive compensation to the value of our equity.

 

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In connection with their annual grants, all LTIP participants are required to sign the company’s form of restrictive covenant agreement, which includes noncompetition, nonsolicitation and nondisclosure covenants. All of our named executive officers have signed and returned such agreements for each year in which they have participated in the LTIP.

Stock Purchase Policy

Historically, to align the interests of our executive officers with our shareholders, we have required our executive officers to purchase, using their own funds, shares of our Class B common stock at levels described in the table shown below, subject to the overall cap indicated. As of December 31, 2016, all of our named executive officers covered by this policy met these targets. Following this offering, this policy will be replaced by a stock ownership policy. See “—Looking Forward.”

 

Position

   Purchase Requirement as a Multiple
of Base Salary
     Purchase Cap  

Chief Executive Officer

     1.5 times      $ 3,100,000  

CEO Direct Reports

     1.0 times      $ 1,500,000  

Clawback Policy

The company has a policy requiring forfeiture of deferred LTIP payments upon any executive’s breach of confidentiality obligations, or breach of post-employment noncompetition or nonsolicitation agreements.

Retirement Focus

Our compensation committee believes it is important to use retirement programs that encourage our named executive officers to continue long-term careers with us. For example, stock ownership and equity awards are critical to each such executive’s ability to adequately provide for his or her retirement. Our named executive officers hold equity and cash awards that vest over time, or are deferred over time. We also encourage, although do not mandate, that our named executive officers maintain certain stock ownership levels until retirement.

In addition, our company maintains a 401(k) plan available to our employees generally, including our named executive officers. The company makes discretionary contributions to each participant’s account each year based on his or her voluntary contribution amount, eligible compensation and years of service.

2016 Compensation

Summary

Our executive compensation program is tied to the performance of the company and is structured to ensure that, due to the nature of the business and the degree of competitiveness for executive talent, there is an appropriate balance between:

 

    fixed and variable compensation;

 

    short-term and long-term compensation; and

 

    cash and equity compensation.

Each element of pay is determined and measured by:

 

    competitive compensation data;

 

    financial, operational and strategic goals;

 

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    short-term and long-term performance of the company compared with its peer group; and

 

    individual contribution to the success of the company.

For 2016, our compensation committee, in consultation with its independent compensation consultant, established target TDC levels of our named executive officers. To inform its decision-making with respect to the appropriate target range, our compensation committee reviewed target TDC levels of those provided to executives holding equivalent positions in the peer group (described above) and those provided to executives holding equivalent positions in the adjusted general industry survey data (described above). See “—Process of Setting Compensation—Market Assessment against Peer Group.” Our compensation committee believes that changes made in target TDC for 2016, as discussed further below, were necessary to provide each named executive officer with compensation appropriate for his or her respective peer group and position. Our compensation committee also believes that payments and awards were consistent with the company’s financial performance and size, as well as the individual performance of each of the named executive officers, and that target TDC was reasonable.

Elements of 2016 Compensation

Total compensation for the named executive officers consists of one or more of the following components:

 

    base salary;

 

    cash-based annual incentive awards;

 

    long-term incentive (cash and equity) awards;

 

    health and welfare benefits; and

 

    limited perquisite benefits.

Our compensation committee, with recommendations from management, works to create what it believes is the best mix of these components in delivering target TDC. In making its target TDC decisions annually, our compensation committee reviews all elements of target TDC separately and in the aggregate. These compensation components are comparable to those of the company’s competitors and peer group.

Determining 2016 Compensation

In its review of target TDC for our executive officers, and, in particular, in determining the amount and form of incentive awards discussed below, our compensation committee generally considers several factors. Among these factors are:

 

    market information with respect to cash and long-term compensation;

 

    the officer’s existing compensation package;

 

    annual bonus and other compensation;

 

    the officer’s responsibilities and performance during the calendar year; and

 

    our overall performance during prior calendar years and our future objectives and challenges.

At transportation companies, generally the largest elements of compensation are paid in the form of annual short-term incentives and long-term compensation. Compensation mix and industry profitability vary as the industry faces many risk factors, such as those associated with the economy, safety and fuel prices.

Our compensation committee generally determines bonus targets and long-term incentive awards based on each employee’s relevant peer group match, considering individual performance and experience. Our

 

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compensation committee has retained FW Cook as its compensation consultant. FW Cook reports directly to our compensation committee and has no other engagements with the company. See “—Process of Setting Compensation—Market Assessment against Peer Group.” In 2015, FW Cook prepared a study providing information and an independent analysis of the company’s executive compensation program. The results of the study included observations about the competitiveness of 2015 target TDC levels, which informed potential adjustments for 2016.

Our compensation committee does not rely solely on predetermined formulas or a limited set of criteria when it evaluates the individual performance of our named executive officers. Our compensation committee considers actual results against deliverables and also bases its compensation decisions for the named executive officers on:

 

    leadership;

 

    the execution of business plans;

 

    strategic results;

 

    operating results;

 

    growth in net income;

 

    size and complexity of the business;

 

    experience;

 

    strengthening of competitive position;

 

    analysis of competitive compensation practices; and

 

    an assessment of our performance.

Where possible, the above criteria were compared with our peer group, taking into account the Chief Executive Officer’s input for his direct reports. For our Chief Executive Officer, the above criteria were compared with our peer group, taking into account input from members of our compensation committee. Our Chief Executive Officer did not participate in any of our compensation committee’s deliberations regarding his own compensation.

Base Salary

Our compensation committee believes that competitive levels of cash compensation, together with equity-based and other incentive programs, are necessary for motivating and retaining the company’s executives. Salaries provide executives with a base level of monthly income and help achieve the objectives outlined above by attracting and retaining strong talent. Base salaries are evaluated annually for all the named executive officers. Generally, base salaries are not directly related to specific measures of corporate performance, but are determined by the relevance of experience, the scope and complexity of the position, current job responsibilities, retention and relative salaries of the peer group members. Our compensation committee may elect not to increase a named executive officer’s annual salary, and has so elected in prior years. However, if warranted, our compensation committee may increase base salary where a named executive officer takes on added responsibilities or is promoted.

 

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